Debt Issues

[stevenash]

 

President Obama left his successor many time bombs—think chemical weapons in Syria and the collapsing Affordable Care Act. But a burning fuse that gets less attention showed its first signs of the explosion to come in Friday’s Congressional Budget Office budget review for March: Rising net interest payments on the national debt.

CBO reported that the federal budget deficit rose $63 billion in the first half of fiscal 2017 (October-March) to $522 billion from a year earlier. But here’s the especially bad omen: Net interest payments rose $7 billion, or 30%, in March from a year earlier.

 

 

If that seems small, consider that interest payments rose $28 billion for the six months of fiscal 2017 to $152 billion. That’s a 22.2% increase, among the biggest in any single spending item highlighted by CBO. The increases reflect the growing debt but in particular the Federal Reserve’s decision to raise interest rates after years of near-zero rates.

 

While Mr. Obama was doubling the national debt over eight years, the Fed’s monetary policies spared him from the fiscal consequences. The Fed’s near-zero policy kept interest rates at historic lows that reduced net interest payments even as the overall debt increased. The Fed’s bond-buying programs also earned money that the Fed turned over to Treasury each year, reducing the size of the federal budget deficit by tens of billions of dollars.

This not-so-free Fed lunch is starting to end. CBO estimates that $160 billion more spending will be required each year over the next decade if interest rates are merely one percentage point higher than in its current projections. As interest rates rise, the Fed will also have to pay banks more to keep excess reserves parked at the central bank. After its latest rate increase in March, the Fed now pays banks 1% on reserve balances or about $20 billion a year, and that will go up.

Fed officials are also now hinting that this year they may finally stop buying new securities when the current bonds on its balance sheet come due. This is necessary and long overdue, but it will mean smaller Fed contributions to the federal budget than the more than $90 billion the Fed has turned over in recent years. (See the nearby chart.)

All of this is set to explode on President Trump’s watch, and it will complicate the task for Republicans as they try to reform the tax code within tighter budget constraints.

Mr. Obama didn’t expect a Republican to succeed him but we doubt he regrets this result. He was able to live off the eight years of accommodative Fed policy while seeding the federal fisc with ever-higher spending from interest payments and the Affordable Care Act after he leaves office. Mr. Trump is stuck with the bar tab. It’s one more mess Mr. Obama left others to clean up.

[Hagar]

Like most (sadly, even many economists), I know little about the Big Picture, but this looks bad.  Really bad.  I'll put it in country terms.  We took shovels and dug us a hole so deep, we can't get out to fill it back in.

[LumRaiderFan]

46 minutes ago, REBgp said:

Like most (sadly, even many economists), I know little about the Big Picture, but this looks bad.  Really bad.  I'll put it in country terms.  We took shovels and dug us a hole so deep, we can't get out to fill it back in.

What's even sadder is the Democrats will successfully blame the Republicans for not being able to fill the hole...with the assistance of our esteemed media, of course.

[Hagar]

4 minutes ago, LumRaiderFan said:

What's even sadder is the Democrats will successfully blame the Republicans for not being able to fill the hole...with the assistance of our esteemed media, of course.

As I heard a man I respect (Rush) say recently, the democrats are not the republicans biggest problem, the mainstream media is.

[LumRaiderFan]

7 minutes ago, REBgp said:

As I heard a man I respect (Rush) say recently, the democrats are not the republicans biggest problem, the mainstream media is.

Sure seems that way...thank goodness for Fox News.

[stevenash]

8 minutes ago, REBgp said:

As I heard a man I respect (Rush) say recently, the democrats are not the republicans biggest problem, the mainstream media is.

I wonder if NewTobie respects Rush.