National Debt Down in May
There has been a lot of happy talk about the federal deficit lately. Its finally going down.
On May 17th, the CBO projected a U.S. federal deficit below $1 trillion for the first time in 5 years. CBO’s projected 2013 deficit: $669 billion. It isn’t, but in this day and age that is considered good.
A remarkable proof of a real change is already beginning to show up. In the month of May 2013, the U.S. national debt actually went down by $80 billion! That is a rare accomplishment. This might be the first time this writer has ever reported positive news about the national debt.
That tidbit of good news got lost in the firestorm of scandals sucking up all the media air. It isn’t sexy enough to report.
The deficit isn’t what matters. What really matters is the national debt!
Deficits vs. Debt
It seems impossible, but the federal government can run net cash surpluses for years, yet the national debt still gets bigger and bigger.
For example, from 1998 through 2001 there were surpluses 4 strait years. Remember at the end of the Clinton Administration when everyone was talking about paying off our massive $5.7 trillion national debt in 10 years? Yet, even with net surpluses the national debt increased.
That is quite a trick, but the federal government is up to the challenge! Simple. All you have to do is ignore interest payments on the national debt. The federal government specializes in ignoring stuff. Today, the national debt is $16.7 trillion.
What the federal government does when budgeting is like a homeowner budgeting for the year without including their mortgage interest payments.
Try that at home and see where it gets you!
Btw, the last time the national debt was paid down over a whole year was 1957… 65 years ago.
Why did debt go down in May?
By order of impact:
- Tax increases (the biggie)
- 2.1% payroll tax increase (Social Security)
- Increased base tax rates for the rich
- Obamacare taxes ($18 billion)
- Increase in capital gains tax
- Marginally improving economy
- Minor sequestration effect
The vast majority of debt reduction came from tax increases agreed to in the middle of the night last New Year’s Eve.
Despite what you hear on CNN, don’t equate sequestration with spending cuts. It isn’t. Sequestration is a decrease in the increase in federal spending.
Think of sequestration this way…
Suppose $100 million was spent last year on IRS and GSA parties. A built-in increase allows them to spend $105 million this year. But pesky taxpayers complain, so they decide to spend only $104 million this year instead. The President and Congress both decide to loudly moan and complain about it and then punish the citizenry by cutting things people like.
That’s sequestration. It isn’t a spending cut at all! All told, sequestration “reductions” amount to only about $45 billion this year. That isn’t enough to amount to a hill of beans in a $3.7 trillion budget!
We made a small dent in the national debt, but are not out of the woods. Far from it. The United States has a very serious debt problem. No two ways about it, it’ll require major entitlement reform before it’s over.
The Fed is spending $40 billion/month purchasing government debt. It is also creating an additional $45 billion/month in new wealth by buying up private-sector assets and making the cash available to the big banks. The big banks are sitting on that cash, not spending it.
The purchases are making Wall Street very happy. It is driving stock prices to the stratosphere and creating something we don’t need…. more Wall Street billionaires.
The great hidden danger lies when the banks finally start spending all those trillions they have hoarded.
When that happens, and world economies really do start improving, then what goes down, must come up. Interest rates on U.S. Treasuries will rise.
In 2012, the federal government spent $360 billion in interest on the national debt. That is the cost the government ignores when budgeting.
Interest rates on 10-year Treasury securities are about 2% right now. When it returns back to its historical average of 4.5% then yearly interest costs will easily top $1 trillion.
If significant inflation is triggered by current Fed policy, then U.S. Treasury 10-year bond rates will rise above 4.5% and no amount of tax increases will keep up with debt growth.
Should that happened then bend over, put your head between your legs and kiss… welll… you know the rest.