America’s Headed for an Interest Payment Crisis

Americans face a daunting battle with interest payments.

Years of unchecked spending has culminated in a massive $33 trillion of national debt. As a result, the nation is funneling an eye-watering trillion dollars every year solely on servicing the debt. But just how dire is the situation? Is it the impending financial disaster that experts, including former White House Economic Advisor Steve Moore, predict it will be?

The Burden We Bear

This past September saw the national debt scale a staggering $33 trillion, rising by a trillion in just a few months. And it isn’t an isolated occurrence. Debt has been swelling due to a multitude of factors, including wars in Afghanistan and Iraq, the crippling 2008 recession, and the recent economic aftermath of the COVID-19 pandemic.

Financial experts have long voiced concerns about the current trajectory, and Moore’s outlook is particularly bleak, saying the “national interest payments on a $33 trillion national debt will soon become the number one expenditure in the budget.”

But is Moore’s prediction accurate?

“Right now, we still spend more on national defense, but interest payments will likely overcome that amount within a couple of years,” Kent Smetters, Boettner Chair Professor at the University of Pennsylvania’s Wharton School told Newsweek.

A Closer Look at the Figures

America paid a whopping $659 billion this year just on interest, nearly double the $352 billion paid in 2021, according to a Treasury report issued Friday. How’d we get there? It all comes down to a mix of fiscal imbalances and Federal Reserve rate hikes.

The Wharton’s Budget Model team offers a more in-depth perspective. As of the end of last month, while the much-reported on “public outstanding debt” figure stands at $33.2 trillion, “debt held by the public” stands at $26.3 trillion, which is roughly 98 percent of the projected gross domestic product.

Current debt ceiling debates and looming government shutdowns aside, Wharton estimates that debt held by the public cannot exceed 200 percent of the GDP and gave the U.S. 20 years to take corrective action before it’s inevitable that it defaults on its debt.

However, it’s not just about cold, hard numbers. It’s about missed opportunities.

The Committee for a Responsible Federal Budget draws attention to the fact that the U.S. now spends more on debt interest than on critical programs for children, like education.

Earlier this month, Republican Presidential hopeful Vivek Ramaswamy said the U.S. would have a surplus had the government invested the “same way our financial advisors would tell us to invest,” alluding to a dropped ball by the Federal government.

The Broader Economic Implications

Brian Riedl from the Manhattan Institute has a bleak prediction. If the trend continues, nearly 30 percent of all federal tax revenue will go towards debt interest payments by decade’s end. It’s a situation that would force the U.S. to borrow even more, deepening the crisis.

However, opinions diverge with Wharton’s 20-year, 200 percent prediction. Some experts, like Dean Baker from the Center for Economic and Policy Research, believe the situation is being blown out of proportion, noting to the Washington Post that counties like Japan had no problem owning “twice as much debt as a share of its economy as the United States does.”

Forecasting the Road Ahead

The challenges of predicting the U.S. government’s future debt path are evident in the Wharton team’s report. Their primary tool, the Dynamic Overlapping-Generations Model, though used extensively, has its limitations. These models sometimes falter when trying to forecast long-term macroeconomic patterns under existing fiscal policies, leading to the introduction of the “closure rule.”

Additionally, the Wharton team introduced a more advanced model that offers a more confident analysis of debt and its relationship with financial markets.

With soaring government debt, financial markets will inevitably demand higher interest rates. And if the markets foresee uncontrollable debt surges, they might push for even steeper returns, leading to a vicious cycle of rising borrowing costs and accelerating debt growth.

Unchecked, the debt could evolve into a severe economic hurdle. However, some believe that soaring interest rates might force a reevaluation of national policies. With borrowing becoming more expensive, investments might shift towards more lucrative assets, potentially guiding the nation towards more fruitful paths.

The U.S. national debt and its associated interest payment woes aren’t just figures on a ledger—they represent a potential future rife with economic challenges, as evidenced by the fact that each American taxpayer theoretically owes $98,460 as of the end of last.