Federal Reserve officials expect to keep interest rates high for years, and it’s not just credit card holders and homebuyers who will feel the pinch. The U.S. government will too, to the tune of trillions with a T. It hasn’t been difficult for the federal budget to balloon well beyond revenue. That’s not just because it’s easy to finance, with U.S. sovereign debt an attractive asset sought the world over, but also because rates had been so low for a decade and a half. No longer. Now the Fed expects to keep its main policy rate above 5 percent through the end of next year. By the end of 2026, it could still be at roughly 3 percent. If that bears out, that’s a brave new world. The piece of the budget eaten up by interest payments is already projected to be about 10 percent, or $663 billion, for fiscal 2023, according to the Center on Budget and Policy Priorities. And the Congressional Budget Office expects those costs to grow. That’s compared to an estimated $806 billion for national defense. “If you look at the CBO outlook, we’re going to spend about $80 trillion over the next 10 years, and about $10 trillion of that is interest,” Douglas Holtz-Eakin, who headed the office under George W. Bush, told MM. That’s based on the 10-year Treasury note settling at 3.8 percent, compared to about 4.6 percent right now, leaving open the possibility that those costs could grow by, say, another trillion or so. How much should we care? That’s tough to answer. There are, of course, modern monetary theorists who believe that government spending is too high only when it causes excessive inflation, and otherwise isn’t a problem. But mainstream economists generally argue that there are costs to allowing government debt, and interest on it, to become too large in proportion to GDP, with implications for productivity and growth. What’s less clear is whether voters care. Sure, they tend to say they do. But debt is an abstract idea that doesn’t seem to drive votes. Sarah Binder, a political science professor at George Washington University, said when it comes to principles, people tend to be conservative, criticizing the notion of “out-of-control spending.” “But operationally people are kind of liberal,” balking at cuts to popular programs, she added. And they don’t want to pay more in taxes either. One irony is that some American households are also benefiting from higher interest costs. Apollo Global Management’s Torsten Slok, who has a chart for every occasion, recently pointed out that U.S. households have bought about $1.5 trillion in Treasury securities since the Fed started raising rates (this category includes domestic hedge funds, so take that into account, but it’s still a big jump). “Real money” investors like pension funds and insurance companies have also jumped into the fray over the past six months. Another irony: discretionary spending — the part that continually leads to threats of a shutdown or debt ceiling breach — is only a quarter of the budget. The lion’s share of federal dollars go to entitlement programs. Social Security, Medicare and Medicaid alone are about 40 percent of the budget. President Joe Biden’s administration has pushed for more revenue, such as through higher taxes on wealthier Americans and businesses and fewer loopholes. But with Trump-era tax cuts expiring in 2025, the next president will have to negotiate what to extend, potentially adding significantly to annual deficits. Higher interest costs are getting attention in Washington, “but it’s not producing anything like a coherent strategy to deal with the budget outlook,” said Holtz-Eakin, now head of the right-leaning American Action Forum. Still, and here’s the rub: we’re not close to a crisis, he said: “Our problem is not going to be something that looks like Greece or Portugal; we’re a mess but so is the rest of the world. We’re still a relatively attractive place to put your money.” HAPPY OCT. 3 — Also known as Mean Girls Day. Send tips and spooky movie ideas to your regular MM hosts, Zach Warmbrodt and Sam Sutton, as well as your trusty stand-ins, Victoria Guida and Jasper Goodman.
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