(This column originally appeared in The Guardian)
A recent report from the Federal Reserve warned that consumer debt is now more than $18tn and the people are worried. Americans’ “credit card and household debt reach all-time high”, reports Fox News. Consumers are “finding it harder and harder to pay off their debt”, claims CNN. A “third of Americans have more credit card debt than emergency savings”, says Marketplace.
Yes, consumer debt has ticked up this year. It’s true that some consumer debt — particularly student loans — has soared in the past few years. But — although worrisome — this debt is still being used to fund education and skills. Other consumer debts are being used to buy homes and cars and fund the purchases that make life livable, not to mention the many industries that rely on this spending.
I’m not worried about consumer debt. But as a business owner I am worried about our national debt. After years of hearing and ignoring the warnings, I’m starting to see just how this debt is going to actually hit my business. And yours.
Will it be because of a default? That’s unlikely. We are not Greece. Our debts — most of which are to real-life people, companies and governments — aren’t in a currency that we don’t control. It’s in US dollars. That’s a good thing. But also a bad thing.
Here’s why: our interest payments as a percentage of total federal spending are ballooning. When our government spent money in 2020, 7% went towards interest. In just four years, that number has more than doubled to 16%. That’s because our levels of debt have increased during that time from $24tn to $36tn and interest rates charged to banks have increased from close to zero to over 4%.
If 16 cents on every dollar is now being spent by the government on interest, where does that money come from? It has to be taken from somewhere. How does the government meet these obligations? There are only three ways.
The government can cut expenses in order to afford these higher interest costs. But c’mon, despite Elon Musk and the PR campaign of the so-called “department of government efficiency’”, how much will really be cut in the end? When has the federal government actually decreased its expenses? Never. Almost two-thirds of our government budget is non-discretionary payment for social security, Medicare, defense and other entitlements. And in the end, how much will really be saved after all the lawsuits, negotiations and accounting trickery?
What about revenue increases? Please. As if the government is going to raise taxes at the exact time that the Trump administration is pushing trillions of dollars of permanent tax cuts. That is political suicide.
Which really leaves only one solution: printing more money. Greece couldn’t do that, because being on the euro, it wasn’t their money to print. But the Fed can print money all day to meet our obligations. And that’s exactly what they’ll do.
Why should we care? It’s simple supply and demand. More money in the system that’s just paying interest and not being used to produce any tangible product creates an oversupply. And what happens when there’s too much of something? It loses its value. And in this case, that loss of value will ultimately drive more inflation. And to combat this, the Fed will need to maintain higher interest rates, which keeps us in the same never-ending cycle.
Some economists still believe that inflation will return to the Fed’s preferred 2% level. Maybe, but only in the very short run. But if you’re running a small business you can expect that higher than historical inflation and interest rates — even higher than what we have today — will probably be the norm for the foreseeable future. I don’t see any other scenario. Consumers don’t have a debt problem. Our government does.
