There is a definite RISC to this thinking.
There are economists that maintain that the US need not worry about the growing size of our national debt. Some of those economists argue that when the interest rate on government borrowing is below the growth rate of the economy, financing the debt should be sustainable. They go on to postulate that interest rates will probably stay low for quite some time because of demographics. This seems to assume that the inflation beast is indefinitely dormant if not slain, a position not held by us at ITR owing to the labor shortage, protectionism-related trade issues, nationalism, and the magnitude of fiat currency created globally since 2008.
Their position seems like it could be legitimate if one were to consider only the short term and give no thought to having to pay back the debt. But this is fallacious; ignoring the longer term is what makes it so easy to run up these debts. Even if the world were to continue to lend us money through an indefinite future – a questionable assumption in an age of nationalism – paying the interest on the debt becomes relatively debilitating, particularly when deficit spending surges by 17% as in FY18. The reality of the situation from our perspective is that interest rates are going to generally rise through the next 10 years because we are heading toward higher rates of inflation. You could argue that the demographics of the US could temper how high that inflation gets, but then you would have to acknowledge that the aging population is going to consume more and more health care dollars and Social Security dollars. The federal government must come up with that money somehow. As is true whenever the government wishes to spend additional money, the means to do so are:
Raise taxes (tax the rich more and more)
Inflate your way out (buy what you want using cheaper dollars)
Stop spending the money on other programs (prioritize and shrink government)
Change the benefits structure (baby boomers and others take a haircut)
You can decide for yourself which of these RISC factors are more likely, or in what combination they might be implemented. Given FY18 spending, it is clear that something needs to be done just to stabilize the financial platform of our government. Bringing down the national debt itself – not just the level of deficit spending, which is simply how fast we add to the national debt – is not even on the table for discussion.
If the premise is that it is okay to live beyond our means because we will never have to pay back the loan, the opportunity cost associated with the interest expense incurred by the federal government must still be considered. The current federal government spend on interest is $523 billion. The figure is climbing as the size of the debt climbs and as interest rates rise. Every dollar spent on interest expense is a dollar that must be viewed through RISC. Since 1974, politicians of both major parties have wanted it all at various times. Therein lies the real danger of thinking our debt is harmless. We blame the other person when expedient, and we are not forcing a prioritization of national needs. We cannot afford to have it all. Hoping the world doesn’t mind paying our bills ad infinitum is not a sound strategy.
We can get by tomorrow and likely the next several years. But eventually the reality of it all will become painful enough to require change. More will be the pity we didn’t change before the real pain began.
We will have more to share on this topic in the March 9, 2019, ITR Trends Report™ Executive Summary.