10. Leadership Worse Than Absent
The interest rate is the price of money. When the interest rate is above the rate of inflation, our money has a positive cost and value. When the interest rate is below the rate of inflation, the cost of money is said to be negative. Money is never priced negatively on its own; it takes much manipulation by our Federal Reserve. When our money is negatively priced for too long, it reduces its value, causing the prices of goods and services to go up, or inflation.
For 20 years (from 2002 until 2021), the interest rate was held artificially low by our Federal Reserve in two ways: by keeping the overnight rate (Fed Funds) below the rate of inflation and by electronically "printing" trillions of dollars that flowed into the economy. These actions caused interest rates to remain artificially low, often negative, for two decades. This changed our behaviors, and not for the better.
First, the artificially low rates benefited mortgages, allowing many Americans to borrow much more than they otherwise would have borrowed if the interest rate had been positive. Most of the low-priced mortgage debt was purchased by the government, and now with the 30-year mortgage rate above 8%, that debt is trading at 60%-65% of what our government paid. The cost of the losses on these mortgages will be borne by every American.
Negative rates and printed money by our Federal Reserve also allowed the very wealthy and large corporations to make money with borrowed funds, shifting wealth from the middle class to the upper 1%. The negative price of money, as well as the printed money by our government, created a phantom tax on the middle class, most of whom only have income from their labor.
During this period, the national debt grew from $6.228 trillion in 2002 to $33.700 trillion today (according to the Debt Clock) - a 541% increase, while the economy grew from $10.929 trillion (per Macrotrends) to an estimated $26.91 trillion (according to BEA.Gov) - a 246% increase. Debt has grown almost twice as fast as the economy. The artificially low rates reduced the annual cost of servicing the growing debt. This lulled Congress into excessive borrowing, putting the country in a bad place when real interest rates returned – as everyone should have known they would.
In 2021, the average interest rate on the national debt was 1.605% (per Pew Research Center). All four Fed Chairs this century had a hand in making this happen. In fiscal year ’23 (ending this past September), the average interest on the national debt was 2.92% (according to Statista). This represents a huge 81% increase in just two years! In FY ‘24, we have to refinance the expiring $7.6 trillion (according to Market Watch) and roughly $2 trillion of annual deficit. The total refinance number will be close to $9.5 trillion, and the average interest rate on the new debt will be above 5%! The average federal debt interest rate will rise to at least 3.4% on $35 trillion by the end of FY ’24. If that were to hold steady for a year, the annual interest cost on the federal debt would come to $1.19 trillion.
The Congressional Budget Office (CBO) in June of ’23 estimated interest costs for FY ’23 to be $663 billion, for FY ’24 to be $745 billion, and projected it to reach $1.4 trillion by FY ’33. Actual interest paid on the debt in FY ’23 was over $700 billion. Worse yet, by this time next year, it could easily exceed $900 billion, becoming our biggest expense outside entitlements. Who is addressing this enormous budget problem? No one. Our political class continues to fail us where it counts, while the Fed worsens a problem of its own making.
Have a blessed week!
Tony Christ October 19, 2023