The US national debt is spiraling out of control. Every six months, the federal government borrows $1 trillion, and most on Capitol Hill are turning a blind eye to the ocean of red ink seeping through the streets of Washington as the interest payments alone grow to staggering heights. Is it any wonder why policymakers are desperate to confiscate more wealth from the American people and corporations? Income tax revenues are proving to be an insufficient form of funding government operations.
Interest Payments Eating Revenues
The Treasury Department recently released the July Monthly Treasury Statement, outlining federal outlays, receipts, and the budget imbalance. The result? The deficit exceeded $1.5 trillion in the first ten months of the current fiscal year, with two more months to go. The Congressional Budget Office (CBO), a non-partisan budget watchdog, might have been accurate when it revised its forecast upward by $400 billion to $1.9 trillion.
But this is only part of the story from the fascinating tale of debt and deficits. Interest payments consumed more than half of the income tax revenue generated in July. Based on projections from the Treasury, debt-servicing payments will absorb more than half of all income tax collections in fiscal year 2024.
Looking ahead to the next decade, the CBO forecasts that cumulative revenues – individual income taxes, payroll taxes, and corporate income taxes – will be more than $62 trillion. By comparison, interest payments will be close to $13 trillion. This means that one-fifth of all taxes will be dedicated to servicing the national debt, which is expected to surpass $52 trillion by 2034.
Remember, the United States receives nothing from interest payments. David M. Walker, the former Comptroller General of the Treasury, wrote this foreword in the latest book The Greatest Ponzi Scheme on Earth:
"The sad but simple truth is that America is failing, but we can turn it around if we have the will. We are in deep trouble without a plan to fix it…the federal government has grown too big, promised too much, subsidized too many, and has lost control of the budget…Shockingly, interest is the federal government’s fastest growing expense. And what do we get for interest? Nothing!"
Inflation Is Over?
Economists, politicians, and financial markets cheered on the possible annihilation of inflation. Here is a breakdown of what transpired on the inflation front. The Consumer Price Index (CPI) eased to 2.9% in July, the lowest reading in three years. The Producer Price Index (PPI), a gauge of prices paid for goods and services by businesses, rose much less than expected (0.1% compared to 0.2%). The Federal Reserve Bank of New York's Survey of Consumer Expectations (SCE) showed that the three-year inflation outlook plummeted by 0.6% to 2.3%, a series low.
Unfortunately, it was not sunshine, lollipops, and rainbows and everything that's wonderful is sure to come your way. Within the CPI report, shelter costs remained stubbornly high, motor vehicle insurance surged, transportation services climbed, eggs rocketed, and meat prices were mostly up across the board. Additionally, real (inflation-adjusted) average weekly earnings tumbled by 0.2% last month, but real average hourly earnings swelled 0.7%.
Other factors that need to be monitored are the underreported inflationary pressures brewing. The Bureau of Labor Statistics reported that export prices surged at a higher-than-expected pace of 0.7%, and import costs edged up at a higher-than-expected rate of 0.1%. Moreover, the Philadelphia Fed Manufacturing Index, which tanked in August, highlighted higher prices paid and received. The New York Empire State Manufacturing Index, which was stuck in contraction territory for the ninth consecutive month, showed an increase in input prices, though at a slower pace.
Is inflation over? The consensus is that the war is over, and a soft landing has been achieved. Of course, tell that to the millions of Americans who think the nation is in a recession because of above-trend inflation and a high cost of living.
Long Live the Consumer – or Not
Consumers may think the nation is in an economic downturn, but they are spending as if it were in the middle of the Roaring Twenties—or not. According to the US Census Bureau, retail sales surged 1% month-over-month in July, up from a downwardly revised 0.2% in June and higher than the consensus estimate of 0.3%. This represented the largest monthly increase since January 2023, buoyed by sales at motor vehicle and part dealers, electronics and appliance stores, and supermarkets.
But here’s the deal: Real (inflation-adjusted) retail sales, however, fell 0.4%. In fact, real retail sales have been flat for the last four years, meaning that consumers are paying more for the same or less. Plus, considering that credit card debt is at an all-time high – $1.14 trillion from the New York Fed's latest quarterly report – it is safe to say that many transactions were covered by tapping, inserting, and swiping that will bolster consumers’ interest payments. Who could also forget the Buy Now Pay Later scheme?
Still, financial markets cheered the news as the retail sales figures soothed recession fears. Indeed, whether the Atlanta Fed GDPNow Model or the New York Fed Staff, the US looks like it will avert a recession this year. But when vast amounts of households are struggling, drowning in debt, and falling behind inflation, could the public take a page out of the mainstream media and the White House and redefine the term?
