By: Jeffrey Winograd
- GAO warns of unsustainable federal debt.
- GOP conservatives draw line in the sand.
- Jamie Dimon of JPMorgan Chase sounds the alarm.
- Federal debt stands at $31 trillion.
- Interest on federal debt is soaring.
- Vote on increasing debt limit is on the horizon.
A recent report by the Government Accountability Office pulled no punches when it comes to the financial health of the federal government which it views as being in critical condition.
At the same time, it sends a powerful message that the Republican-only Freedom Caucus in the House of Representatives is spot on with one of its key concerns – the out-of-control federal debt.
The Freedom Caucus, which is no Johnny come lately with its focus on “limitless federal spending,” made clear its intentions in a Dec. 8, 2022, “Dear Colleague” letter. “We must commit to not raising the debt ceiling without a concrete plan to cap spending and operate under a budget that balances in 10 years or less – and hold to it In addition, we must not return to the blind embrace of earmarks emblematic of the swamp,” said the letter which carried seven signatures.
A key Wall Street figure has just stepped into the role of pathfinder on the issue for the financial sector. Jamie Dimon, the head honcho of JP Morgan Chase & Co., on Jan. 10 told Maria Bartiromo of Fox Business that the problem is not today but when the federal debt hits 130% of gross domestic product. “I’m talking about on the day that America can’t pay its debt, that has potentially disastrous outcomes,” he said.
Dimon laid out a scenario where over a period of time there are continuous defaults on Treasury bills. “It is so potentially dangerous we shouldn’t get anywhere near it. And after all the shenanigans of politics, we’re going to have to fix this. I think it’s very bad for the nation to constantly be looking at this type of thing,” he declared, adding that the credit rating of the United States was unimaginably dropped from AAA to AA due to a previous controversy over raising the nation’s debt limit.
GAO’s overriding warning, according to the report, is that the United States is continuing to edge closer and closer to the precipice of a financial meltdown – a situation created courtesy of bipartisan feeding at the trough of unsustainable borrowing.
“From fiscal year 1997, GAO’s first year auditing the [financial books], through September 30, 2022, total federal debt managed by the Bureau of Fiscal Service has increased from $5.4 trillion to $30.9 trillion, and the debt limit has been raised 22 times,” GAO reported. That period of time includes five presidential administrations, six speakers of the House of Representatives and six Senate majority leaders.
According to GAO, during FY 2022, total federal debt increased by some $2.5 trillion. Interest on the public debt ballooned to $497 billion, up from $392 billion in the previous year.
“The primary reason for the increase in debt held by the public was the federal deficit, which was $1.4 trillion for fiscal year 2022,” GAO stated. Another category of federal debt is intragovernmental debt holdings, it noted.
Over the years, repeated delays in raising the debt limit have resulted in increased borrowing costs and this history portends further increases with federal spending “projected to increase more rapidly than revenue,” the report said. “Absent action to address the growing imbalance between spending and revenue, the federal government faces unsustainable growth in its debt,” GAO warned.
Publicly Held Debt Includes Foreign Owners
As described by GAO, debt held by the public represents the amount the federal government has borrowed from the public to finance cumulative cash deficits.
Debt held by the public, in contrast to intragovernmental debt holdings, “represents a claim on today’s taxpayers and absorbs resources from today’s economy,” GAO explained. “In addition, the interest paid on this debt may reduce budget flexibility because, unlike most of the budget, it cannot be controlled directly,” GAO said.
Since fiscal year 1997, the total federal debt has mushroomed from $5,398 billion to $30,924 billion at the conclusion of FY 2022. In other words, it increased by 473%.
Total federal debt has increased by $9,418 billion, or 44%, from $21,506 billion as of Sept. 30, 2018, to $30,924 billion as of Sept. 30, 2022. This included “an increase in debt held by the public of $4,210 billion – the largest annual dollar increase in history – occurring in FY 2020,” GAO reported.
“Treasury [Department] reporting shows that foreign ownership of Treasury securities represents a significant portion of debt held by the public,” GAO noted. As of June 30, 2022, the amount of foreign holdings of Treasury securities represented an estimated 31% of debt held by the public. The estimated amount of foreign holdings of Treasury securities increased from $983 billion as of June 30, 2001, to $7,431 billion as of June 30, 2022.
The Federal Deficit
As defined by GAO, the federal deficit is the amount by which the government’s spending exceeds its revenues for a given period, usually a fiscal year.
“The primary reason for the increase in debt held by the public was the federal deficit,” said the report, which added “the federal deficit of $1,375 billion for FY 2022 was down from $2,772 billion and $3,132 billion for FYs 2021 and 2020, respectively – the two largest recorded federal deficits in history – and up from $984 billion and $779 billion for FYs 2019 and 2018, respectively.”
GAO attributed the larger deficits for FYs 2020 and 2021to “economic disruptions” related to the COVID-19 pandemic, which both decreased revenues and bolstered federal spending. “The deficit decreased in FY 2022 as a result of revenue growth and the phasedown of the pandemic-related spending, offset by the long-term costs of certain forms of federal student loan debt relief for many borrowers,” it said.
Debt Limit Ceiling and Extraordinary Measures
An attempt to significantly increase the debt limit that began in FY 2021 continued through mid-December 2021. Some progress was made by mid- October when the president signed a bill increased the debt limit by $480 billion, from $28,401 billion to$28,881 billion. However, Treasury still had to resort to “extraordinary actions” to keep from exceeding the debt limit. Finally, on Dec. 16, 2021, legislation was enacted to raise the debt limit by $2,500 billion from $28,881 billion to $31,381 billion.
On Jan.11, an AP article explained the particulars and warned of an upcoming political brouhaha with its attendant economic consequences. “Once the government bumps up against the cap – it could happen any time in the next few weeks or longer – the Treasury Department will be unable to issue new debt without congressional action,” the article said. The department plans to use “extraordinary measures” to keep the government operating “but once those measures run out, probably mid-summer, the government could be at risk of defaulting unless lawmakers and the president agree to lift the limit on the U.S. government’s ability to borrow,” it added.
Interest Payments on Debt
Interest paid on debt held by the public totaled $497 billion in FY 2022. In FY 2021 that amount was $392 billion and in FY 2020 it was $371 billion. The increase from 2021 to 2022 was attributed to an increase in inflation adjustments, an increase in the average interest rates, and an increase in the outstanding debt held by the public.
While noting that interest rates on publicly held debt have been “historically low,” the outlook for the future is bleak, the report said. “In the longer term, interest on debt held by the public is projected to increase overall and as a share of the federal budget as debt grows – from the imbalance between spending and revenue – and as interest rates rise. Interest rates can have a compounding effect on the debt, as borrowing to make interest payments adds to the debt,” GAO said.
What GAO Foresees
Here is how GAO wrapped up its report, with a message to both Democrats and Republicans, as well as the voting public:
“Absent action to address the growing imbalance between spending and revenue, the federal government faces unsustainable growth in its debt. The underlying conditions driving the unsustainable fiscal outlook existed well before the COVID-19 pandemic and continue to pose serious economic, security, and social challenges if not addressed.
“Congress should consider developing a plan to place the government on a sustainable long-term fiscal path. Congress and the administration will need to make difficult budgetary and policy decisions to address the key drivers of the debt and change the government’s fiscal path. A fiscal plan would provide policymakers with a framework to help manage such uncertainty and support difficult policy decisions that will help to achieve a more sustainable fiscal policy. The sooner actions are taken to change policy to alter the government’s fiscal path, the less drastic the changes will need to be.”
This article originally appeared on January 12 at https://unamericanactivities.substack.com