As interest rates get set to rise, Uncle Sam is unprepared to handle the fallout
With the new year in fiscal recklessness and folly underway, it’s worth recalling that, as the Federal Reserve starts raising interest rates, Uncle Sam’s balance sheet will get even worse. And no one in official Washington is prepared for what comes next.
In a study for the Manhattan Institute, Brian Riedl writes:
Today’s trendy economic argument asserts that the current debt-to-GDP ratio of 100% has not harmed the economy, and therefore Congress can easily afford large new government expansions. But that argument has two fatal flaws. First, it fails to acknowledge that over the next few decades—even without new legislation—the debt is already projected to reach levels that even debt doves would likely consider unsustainable. Second, this argument assumes that interest rates will forever remain near today’s low levels, thus minimizing Washington’s cost of servicing this debt. However, economic trends rarely remain linear indefinitely, and interest-rate movements have rarely followed forecaster projections. Indeed, several realistic economic scenarios could easily push interest rates back up to 4%–5% within a few decades—which would coincide with a projected debt surge to greatly increase federal budget interest costs. Debt doves have no backup plan for this possibility. Policymakers should now enact reforms that scale back the escalating long-term debt projections in order to limit the federal government’s risk exposure to a fiscal crisis.
Those warning that rising interest rates would make the federal government’s already dangerous addiction to debt exponentially worse have long been dismissed as cranks…or simply ignored by both major political parties when they are in charge.
The bills will come due – as they always have. Only now, government will have to pay even more just to meet its interest payments. Is anyone in DC ready for this? Have they gamed it out beyond a press release (if that much)? Of course not. But we’ve all been warned.