The magnitude and speed of the ratio’s 2-year spike is unprecedented in modern US history. It does not look good.
By Wolf Richter for WOLF STREET.
What matters the most in terms of the horribly spiking interest payments on the national debt that has exploded to $36.1 trillion by now is their relationship to the tax receipts to pay for those interest payments.
This ratio of “interest payments to tax receipts” jumped to 37.8% in Q3, the highest since 1996, when this ratio was on the downtrend from the scary times in the 1980s, based on a measure of tax receipts released on Wednesday by the Bureau of Economic Analysis as part of its second estimate of Q3 GDP.
The ratio illustrates to what extent the national income that is available to pay for general budget items is being eaten up by interest payments. The magnitude and speed of this spike is unprecedented in modern US history. It does not look good:
Interest payments by the government on its gigantic and ballooning pile of debt surged by $37 billion year-over-year, or by 15%, to $279 billion in Q3 (red in the chart below).
Tax receipts by the federal government in Q3 rose by $29 billion year-over-year, or by 4.1%, to $740 billion (blue).
Tax receipts can spike and plunge with capital gains taxes. Surging financial markets trigger a tsunami of capital gains, and therefore capital gains taxes to be paid the following year by April 15 – which means that those capital-gains tax receipts occur in Q1 and Q2.
- The surge in tax receipts in Q1 and Q2 2022 was driven by capital gains taxes paid on the phenomenal Fed-money-printer year 2021.
- The year 2022 was crummy for markets, and so tax receipts in Q1 and Q2 2023 plunged.
- The start of the recovery of the markets in 2023 caused tax receipts to be higher in early 2024 than in 2023.
- The massive gains in the markets so far in 2024 will trigger big capital gains receipts in Q1 and Q2 2025 (and Trump’s policies will get credit for it, but that’s how it goes).
Tax receipts over the longer term increase through growing incomes, growing employment and wages (more workers earning higher taxable wages), growing profits by businesses, and bubbly financial markets. Inflation is a big factor in inflating tax receipts by inflating taxable incomes and profits of all sorts.
This measure of tax receipts from the BEA tracks what’s available to pay for regular government expenditures, such as interest payments. Excluded are tax receipts that are not available to pay for general expenditures, primarily tax receipts from Social Security and other social insurance programs that are paid for by participants in the systems and are distributed to beneficiaries of the systems.
Interest payments have surged because…
The debt has ballooned at an astounding pace year after year, for many years, including by $2.1 trillion so far in 2024 even during this strong economy. At the end of Q3, the time frame here, the debt had reached $35.5 trillion (now already at $36.1 trillion).
The higher interest rates are entering the debt as new securities are issued to fund the additional new debt, and as old lower-interest-rate Treasury notes and bonds mature and are replaced with new Treasury notes and bonds that carry a higher coupon interest rate. Short-term interest rates enter into the debt very quickly as Treasury bills (terms of one year or less) mature quickly and are replaced with new T-bills at the new rates. There are now over $6 trillion in T-bills outstanding.
The ugly Debt-to-GDP ratio: Total debt as percent of GDP rose to 120.8% in Q3, based on the second estimate of Q3 GDP released by the BEA on Wednesday, after the slight dip in Q2.
The spike in Q2 2020 was the result of the collapse of GDP during the lockdown while the national debt to pay for the stimulus programs exploded. From Q3 2020 through Q1 2023, GDP recovered faster than the debt rose, and the debt-to-GDP ratio declined. But in Q2 2023, the trend reversed as the debt surged faster than GDP rose.
For your amusement, also check out the Debt-to-GDP chart going back to 1966 that we duct-taped into the comments below this article.
The fiscal mess the US has been wallowing in for many years that caused the national debt to explode to $36.1 trillion by now is a long-term problem – encouraged and enabled by the Fed’s free-money policies from 2008 through 2021. It’s called “unsustainable,” even by Powell, because over the long term, it cannot be sustained. Something will happen to address it. Either Congress addresses it. Or inflation addresses it. or both. The US, which controls its own currency, cannot default on its debt, but it can get embroiled in higher inflation, and in higher long-term interest rates that result from this higher inflation. And the US is already well on its way, embroiled in inflation that has now become stubborn.
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As promised in the article, here is the super-ugly debt-to-GDP ratio going back to 1966:
So during the massive spike interest rates of the early 80’s, the debt-to-GDP ratio was 1/4 of what it is today?
People, Congress, Fed, it’s time to wake up. We literally might not be able to afford the next recession.
OMG!
Remember: the debt is cumulative. All the sins accumulate and are never forgiven. So the debt gets worse every year. But GDP is a flow of economic activity in a specific time period. And that flow has to get larger and larger every year to deal with the accumulated debt.
The “early 1980s” so 1981 and 1982 was the massive spike of INFLATION, which inflated the flow of economic activity and helped lower the Debt-to-GDP ratio. After inflation started coming down in 1983 and on, and the debt surged after Reagan’s tax cuts, the Debt-to-GDP ratio began to worsen dramatically.
Context. Yes, tax rates were cut. The result was tax receipts increased. The problem was spending increased faster than tax receipts. Congress, and Reagan, spent too much.
Tbp,
The same stupid lies and propaganda get cited over and over again, decade after decade. Just idiotic BS.
Tax receipts rose DESPITE the tax cuts. But tax receipts would have increased FAR FASTER WITHOUT the tax cuts, and there might have been a balanced budget under Reagan if taxes had not been cut.
Tax receipts increased by 39% during Reagan’s 8 years in office because:
1. CPI inflation increased by 40%. Inflation inflates wages and incomes and profits of all kinds, and thereby tax receipts. So inflation alone is responsible for 40% growth in tax receipts. So all of the growth in tax receipts was attributed to inflation.
2. Employment rose by 13% as the overall population rose by 6.5% and as woman continued entering the work force on a large scale, a huge demographic shift that started in the 1960s. The employment-to-population ratio for women soared from 35% in 1960 to 58% in 2000. During these four decades, the two-earner household became standard. Nothing to do with tax cuts, but the resulting increase in household incomes from two-earner households generated a lot of tax receipts.
Without the tax cuts, tax receipts attributed to the 13% growth in employment (due to population growth and women entering the workforce) would have likely come close to balancing the budget.
It’s one thing to cut taxes for x,y, and z reasons – and we can quibble over that – but it’s another thing to blatantly lie about the fiscal effects of the tax cuts.
“OMG”
Conservatives have been screaming warnings about this for *decades* (whereas Republican politicians may have screamed too – but never *acted* if it got in the way of their own policy delusions/graft).
But only *now* after the ntl debt damage has been done…do some people act shocked! Shocked!
There is a lot of ruin in a country, but not an infinite amount.
I’m still learning so correct me where needed. So I’m going to make the assumption that US political system lacks the fortitude to do anything about it, so higher yields will be required by the market, which will drive up inflation. In addition, since more debt will be issued, economic growth will be starved. So we will become Japan. And if so, how long will it take us to get there? Sure hope DOGE can cut 2 trillion from the government. And sure hope Trump can actually leverage the threat of tariffs without going through with them. And I sure hope they will just go after the criminal illegals and leave the rest to pick and process our food and build houses and provide other services. I didn’t vote for Trump, but I’d love for it to all work out and I would be happy to admit I was wrong. But all that is a tall order that’s short on some specifics. We will find out.
Your initial assumption — “US political system lacks the fortitude to do anything about it” – may end up about right though there’s a lot of talk to the contrary right now. But ultimately, the big stuff will have to be decided by Congress, and Representatives are unlikely to cut the bacon they were expected by their constituents to bring home.
But you got your first three points backwards.
1. “so higher yields will be required by the market, which will drive up inflation.”
No, but higher inflation will drive up yields required by the market.
2. “since more debt will be issued, economic growth will be starved”
No, deficit spending contributes to economic growth. To what extent has been heatedly debated here in the comments.
3. “So we will become Japan.”
Never. Japan is a very unique country and culture, including its insular immigration culture (you cannot just walk across the border unless you can walk on water). The US is the opposite, an immigrant culture.
I’m not going to address your “hopes.” Except, I will note that Trump got the votes of Latino voters (American citizens) whose livelihoods in construction, other trades, and services are threatened by the arrival of 9 million immigrants in 2022, 2023, and 2024 (data from the CBO), who will work for less and undercut them. The only people who are for this explosion of immigration are the wealthy who get cheap labor and therefore higher profits. And Latino-Americans have figured it out and voted against it.
Remember to pay your taxes, tax donkeys.
Those bombs don’t pay for themselves.
What a disgusting government, disgusting people.
If you ever wondered why such elaborate torture devices were created in the middle ages, wonder no more.
“They” don’t call it the Great Reset for nothin!
The piper must be paid –eventually.
But when? May not be in my lifetime, but I do ponder reincarnation. Not sure on how that all works, but odds are, I may end up affected by this anyway. As you said, as I believe with all things, debts must be paid-eventually. So be as good of human that you can possibly be. lol
If you are reincarnated into a dung Beatles you won’t be lacking anything to eat, if you are fortunate enough to be a flying dung Beatle, all the better.
A “bad” human or government doesn’t give a crap about paying their debt….the most vile and loathed….definitely dung Beatle dinner.
Better to run hotter and deflate debts than end up with deflation and have debts equally or even more unserviceable.
Watching the long Treasuries rates can be informative. Rates jumped massively after Powell dropped the 50 point bombshell, probably because long-term bond buyers figured this would spur inflation. In the last week or so, long-term rates have dropped substantially, probably because they now believe Powell’s rate-cutting program will be curtailed.
It is always difficult to find convincing reasons behind market moves, but the long-term bond rates recent ups and downs are unusual, and therefore interesting. I prefer to watch movements in the bond market. Not only is the bond market larger than the stock market, but its movements seem a lot less psychotic.
The bond market is also a lot more important than the stock market.
The government will not cut back spending.
So I guess high inflation it is. Better hope the companies and consumers who were banking on a rate cut are prepared.
My opinion is stagflation is on the way
Markets today have reacted to this distressing news:
Dow, S&P close at all time highs
Mortgage rates move slightly down, lowest in a month
MND reports purchase mortgage applications highest since February (admittedly not a high bar to clear)
Minuscule volume during a shortened trading day = meaningless.
The Fed might cont to cut rates to ease debt payment. If SPY and QQQ
will be in distribution tax collection will rise. The spread between tax receipts and interest payment will rise. Next year tariffs will fill gov coffer.
if the Fed cuts its short-term rates too far, long-term yields will blow out on inflation fears.
Assuming no new rate manipulations intercede, it looks like a set-up for a “vicious cycle” between rising (federal debt) rates and declining US Treasuries security ratings.
(I assume, of course, that this debt service ratio spike is important to the credit analysts.)
Clarification:
Vicious cycle: rising INTEREST rate and falling credit ratings
For my money Wolf, you provide the most complete and accurate information on the internet. I might add, the most unbiased delivery of information day after day. Once in a while a little slips in but then again nobody’s perfect. I anxiously open your website everyday to find out what’s new that I’m going to learn from your hard work.
1:04 PM 11/29/2024
Dow 44,910.65 188.59 0.42%
S&P 500 6,032.38 33.64 0.56%
Nasdaq 19,218.17 157.69 0.83%
VIX 13.51 -0.59 -4.18%
Gold 2,673.90 9.10 0.34%
Oil 68.15 -0.57 -0.83%
The compounding will turn into exponential.
Seems as if it will only matter if a) Foreigners stop buying US Debt and/or b) Foreign producers of the goods we consume stop accepting USD in payment for those goods. A and B are related to each other in some way. Both events seem far off for now so it’s very unlikely that anyone will work to hard to tell the voting public “No”.