There’s an old business joke – We lose money on every sale, but we make it up on volume. This owner will go bankrupt as soon as the money runs out. Any entity that doesn’t collect enough money to cover their costs will face the consequences of their bad pricing decisions. This is true for the US government as well. But in our case, it is more like boiling the frog – he doesn’t realize he is in trouble until its too late.

The national debt of the US just passed the $40 Trillion mark. That is the accumulation of decades of deficits (save for a few surpluses under Bill Clinton in the late 1990s), coupled with the lack of decision making around changes to Social Security (no more surpluses in Social Security means we need to borrow money to pay back the trust fund for all of the years the trust fund lent the general fund money). Now we have national debt as far as the eye can see. Our national debt is about 123% of GDP – we are levered to the hilt – almost twice the percentage of GDP right before the Great Recession in 2008. Since the Great Recession, our national debt has quadrupled! Our interest payments on that debt now exceeds our annual defense budget, about 15% of our expenditures. That’s a fixed cost that will simply compound on itself over time.

Every administration and every Congress could see this coming. Politicians have deluded themselves for decades that cutting taxes to pander to special interests and the electorate (that they’ve convinced that their taxes are being wasted) will result in rapid economic growth to make up for the loss in revenue (i.e. they’ll make it up on volume). But as each tax cut fails to result in outsized economic growth, the federal deficits have ballooned. The most recent example were the 2017 tax cuts (known as the Tax Cuts and Jobs Act (TCJA)). The CBO projected large deficits as a result of that gift to large corporations that cut their taxes by 40%. The Republican leadership (in Congress and President Trump) that promoted that bill said the CBO was wrong, that economic growth would far exceed their projections. But 2025, and a new Trump Administration, came along and lo and behold the CBO projections were correct. Instead of taking this information to heart, the new Republican leadership doubled down and made the tax cuts permanent (and added more tax breaks to the agenda). The new bill (euphemistically called Bill Beautiful Bill) is projected to reduce revenues by $4.5 trillion over a decade (netting to $3.5 Trillion after spending cuts of programs that benefit the poor) – more borrowing, more debt.

More debt has both near term and long term impacts. US debt is now equal to one fourth of the total amount of debt securities in the world – and that percentage is growing. The more debt issued, the more buyers of US debt securities will demand higher interest rates (to both attract buyers away from alternative investments and to account for greater long term repayment risk). Higher rates on Treasuries has downstream impacts – higher mortgage rates, higher business loan interest rates. Higher debt costs are inflationary, encouraging the Federal Reserve to raise short term interest rates (which increases variable credit card interest rates) – all of which lowers economic output. It is no wonder that 30 yr Treasury interest rates reached a 20 year high this week (to the befuddlement of our Treasury Secretary, such that he thought a sudden bond buy-back program would lower rates – which it did, for one day).

The fiscal train wreck that we are experiencing results from a perpetual version of kick-the-can. Politicians wanting to stay in power have no incentive to make the public pay for the common goods provided, let alone the debt servicing costs accumulated over generations. Whether it’s Social Security, infrastructure long past its useful life, or current year expenses, the public is paying the price for their cognitive dissonance (loving lower taxes and hating the resulting inflation from increased government debt). We ignore these consequences at our own peril.

And the national disgrace continues…