Houston, the Problem's Getting Worse
The debt isn't just growing - its growth is accelerating.
For those who speak the language, you’d be thrilled to talk about your portfolio going “to the moon” thanks to your “diamond hands” and that clutch decision to “HODL” — but stratospheric ascents are not what you want to see in the federal debt.
Uh oh…
This week was simply insane. We started by closing in on $34.4 trillion and now we’re closing in on $34.5 trillion. In just 4 days, Yellen borrowed $103 billion.
In the last week, she borrowed $139 billion.
In the last month, a cool $280 billion.
In the last 2 months, $470 billion.
Borrowing for the fiscal year to date is already over $1.3 trillion. Yes, with a “t”.
While these are eyewatering figures and scary enough to begin with, it becomes petrifying when you see the trend is accelerating.
This can be more clearly seen if we zoom in on the chart above and just look at the period from October 2, 2023 until today.
The least squares line (think of it as the trendline that best fits the data) is nonlinear. It’s not a hockey stick graph by any means, but it’s clearly curving upward. Economists at cocktail parties would say the second derivative is positive.
Translation: alarm bells should be ringing in Washington right now.
Let’s put some numbers behind the theory, looking at how fast it has taken to add $100 billion to the federal debt, starting with the most recent $100 billion and working backwards:
4 days
7 days
11 days
18 days
22 days
7 days
28 days
21 days
19 days
It’s not a perfectly smooth progression from more days to fewer days, but you could tell that just by looking at the chart. Even still, the pattern is clear: we’re borrowing faster and faster.
If you annualize borrowing in the current calendar year, it’s over $2.8 trillion, blowing away “official” estimates from government agencies, but more in line with our estimates that we’ve already shared in previous posts.
The Treasury is borrowing about $1 trillion every 100 days, and that’s why the annualized borrowing in the current fiscal year is over $3.1 trillion.
Bank of America (we’re not fans, but they did say it first) recently pointed out that it took 106 days to go from $33 trillion to $34 trillion, but it will likely take only 95 days to go from $34 trillion to $35 trillion.
Does that mean it will only take 84 days to hit $36 trillion?
Quite possibly, but the more important question is “what’s causing the acceleration?”
There are plenty of small factors that the federal government is trying to keep under wraps which are also getting more expensive over time. For example, most people don’t know that illegal aliens are getting all kinds of handouts. Some of that money comes directly from the Feds, and some is given to the states, which then disburse it.
As the cumulative number of people pouring across the southern border grows day after day, these handouts are getting bigger, also by the day.
Still, this is relatively small compared to the entire deficit, so let’s look at a much bigger factor: interest.
The Treasury will auction about $10 trillion in just the next year. You may be wondering how that can be the case when the estimated deficit is less than $2 trillion and even our estimate for the deficit is $3 trillion.
It’s the roll over.
The Treasury doesn’t actually ever pay off debt anymore — they haven’t for years. Instead, as debt comes due, new debt is issued to repay the bondholder. The Treasury rolling over debt is similar to refinancing a mortgage but closer to using one credit card to pay off another.
Just as the consumer is subject to current market rates when rolling over debt, so is the Treasury. That means there’s $8 trillion of debt that needs to be rolled over this year at about 4.2% to 5.5%, depending on the term.
That’s problematic when a good chunk of the debt being rolled over had been issued at low rates around 2% — you’re literally doubling the cost to service that debt.
But keep in mind, T-bills by definition will all roll over within the next year, at least once, so those were not issued in the age of ZIRP when borrowing was beyond cheap. But the notes and bonds coming due all have rates below what’s being seen at today’s auctions.
As more of this old, cheap debt comes due and is reissued at higher rates, the cost of servicing the debt continues to explode. That additional expense adds to the deficit, and the vicious cycle feeds on itself.
Interest on the debt is already at an annualized $1 trillion and rising fast. If we simply maintain current trends, the annualized cost of service the debt will exceed $3 trillion by the fourth quarter of 2030.
This shouldn’t be surprising if we remember when Yellen let the cat out of the bag and said a $50-trillion federal debt was in the near future, but it also somehow wouldn’t be a problem, likely because she intends to strongarm the Fed into inflating it away.
That’s why the Congressional Budget Office, the Treasury, and the Office of Management and Budget all predict interest on the debt will magically shrink, either outright or at least as a percentage of GDP.
Underpinning all three’s assertion is the belief that interest rates will come down hard and fast. Again, the entire federal government apparently thinks we’re just going to inflate the problem away. And maybe we are.
The scary thing is, even if inflation (and not interest rates) is what really stays higher for longer, and the real value of the debt and interest on the debt are both inflated away at historically high rates, the real value of the interest expense still doubles before the end of the decade.
So, yeah, this is bad. It’s worth remembering that all government spending has to be paid for eventually and there’s no easy way out. You can’t cheat the universe — the Laws of Supply and Demand will not be conned.
Unfortunately, so-called fiscal conservatives have been playing Chicken Little for about 4 decades now, repeatedly saying the nation would collapse if we hit a specific debt-to-GDP ratio, or if interest on the debt reached a certain dollar amount, etc.
They were all wrong because no one knows precisely where the point of no return is.
What we do know is that we’re headed in the wrong direction and if we stay on this path, we’re going to go full blown Weimar, replacing wallets with wheelbarrows.
Let’s hope Yellen, Powell, and the other clowns get replaced before it gets that far.
The point of no return is well in the rear view mirror. The dollar is holding up because TINA, remember that forex is all relative. Janet is not borrowing any money because she is just swapping Treasuries for bank reserves, neither of which count as money. The reserves go in the TGA, on which she writes checks, which are then deposited by the payee, creating money. This makes the economy look good, at least by the government's statistics. The inflation tsunami is that dark line on the horizon. Right now I don't see any way to avoid it short of a depression.
There are no alarm bells in Washington, except perhaps when Congress folks are trying to delay a vote so pull the fire alarm 'accidentally'.
If I had to bet, I would estimate the Fed will be coerced into buying before it all blows up, but that means inflation will need to be recalculated again to show it is not rising!