Deloitte & Touche, through their Deloitte University Press, have published a study called The untold story of America’s debt. The pamphlet describes the dire straits in which we find ourselves through our exploding national debt; their high points from their opening summary are quoted below.
- The debt crisis is likely bigger than you think: Current baseline projections make a host of optimistic assumptions [used by the CBO] that very well may not come to pass, that the Bush tax cuts will expire and the cuts to Medicare are allowed to go through. If any of these are reversed by Congress, the debt becomes much larger. Further, current debt levels are significantly higher when the government’s unfunded commitments, particularly around Medicare, are taken into account.
- The magnitude of the debt is highly sensitive to economic fluctuations: America’s reliance on short-term debt makes it highly vulnerable to interest rate fluctuations. If rates return to historical levels, this would significantly increase interest payments on U.S. debt. If GDP fails to match expected growth levels it would further drive up the debt.
- The debt could adversely impact American competitiveness: The U.S. is on track to spend at least $4.2 trillion in interest payments over the next decade, a significant amount of money that will be diverted from investments that could otherwise boost America’s competitiveness.
- The rising debt could impact the independence of monetary policy: As interest payments on U.S. debt consume a growing share of the national budget, the pressure will increase for Congress and the executive branch to apply political pressure on the Federal Reserve in hopes of realizing preferred fiscal policy outcomes.
- The demand for and composition of America’s debt isn’t just America’s decision: Foreign lenders own nearly half of publicly held U.S. debt. It is assumed that such debt holders have insatiable appetites for U.S treasuries. Should lenders stop buying treasuries and invest their money elsewhere, this would force abrupt, and painful, changes in government spending.
They make a couple of additional points, also:
[I]f the Federal Reserve was forced to unexpectedly raise interest rates by 3 percent in 2016 (as occurred in 1981, 1994, and 2004), the total impact would shortly be in excess of $200 billion in additional costs to the U.S. treasury, or more than the annual costs of the wars in Iraq and Afghanistan combined at their peak in 2008.
Who among you out there in readerland think it unlikely, against the present backdrop of near-zero Fed interest rates, that the Fed won’t raise/be forced to raise rates to 3% (which still would be below our historic interest rate levels)? I didn’t think so.
And they offer this table, concerning the sensitivity of our debt size to the underlying assumptions made by the CBO:
Current CBO Target
Increased 10- year deficits
|Nominal Annual GDP Growth||4.7%||3.7%||~ $3T|
|10-Year Treasury Note Interest Rates||4.2%||5.8%||~ $2T|
|Continuation of Hard Cuts/Taxes||Current law is enacted||Current policy (extending Bush tax cuts, suspending Medicare cuts) continues unabated||~ $6T|
Impacts of altering CBO assumptions
When the government runs large deficits, it competes for funds that could be invested in the private sector. Higher costs for capital and limited access to investment will impact the borrowing costs of companies as well. As Harvard Business School professors Richard H.K. Vietor and Matthew Weinziert write, “…If the cost of borrowing rises for the US government, it will rise for private-sector borrowers as well.
And a hint of the impact of interest payments on our fiscal capacity, from the Italian example:
[F]or every percent increase in the interest rate, 1.2 percent more of Italy’s GDP is diverted to paying interest on the national debt.
Notice that: GDP is diverted to service the debt rather than committed to productive activity. And it’s diverted in greater amounts than the simple increase in debt.
Unfortunately, the present administration has shown itself wholly incapable of addressing this threat, as it has demonstrated throughout these last three years, and as President Obama demonstrated again in his hour-long reading last Thursday.
Deloitte & Touche’s full report can be found here.
h/t Power Line