The greatest of all drunken sailors. The average interest rate on Treasury debt has skyrocketed, but it is still only half what it was in 2001.
Written by Wolf Richter of Wolf Street.
The ratio of interest payments to tax revenue is the main measure of the burden of national debt on government finances, or in other words, the extent to which interest payments eat up national income. That means the nation's debt, currently at $34.6 trillion, is ballooning, and the interest rates on that debt are rising. Interest rates rose as inflation rose again after decades of stagnation. However, inflation also increases tax revenues in the long run.
So higher inflation is now the third element in the combination of rising debt, rising interest rates, and rising inflation. Q4 2023:
- Interest payments surged to $256 billion, up $11 billion from Q3
- But tax revenue jumped to $736 billion, up $57 billion from the third quarter.
Additionally, interest payments as a percentage of tax revenue fell to 34.8% in the fourth quarter from 36.1% in the third quarter, the highest since 1997.
Some important points:
- Interest payments as a percentage of tax revenue amounted to 20.4% in the first quarter of 2022, the lowest since 1969 due to lower interest rates, including near-free short-term debt.
- In the 15 years from 1982 to 1997, this ratio was higher than it is now.
- In the decade from 1983 to 1993, this ratio ranged from 45% to 52%.
At the time, when interest payments reached 50% of tax revenue, Congress finally got serious about dealing with the ballooning deficit.
In terms of dollarsDespite the ever-increasing debt, interest payments have barely increased in the 20 years from 1995 to 2015. The reason is simple. The average interest rate on these Treasury bills has continued to decline over the last 20 years.interest payments blue, tax certificate is red.
Tax receipt (red in the table above).
The measure of tax revenue here is what is available to pay for regular government expenditures, including interest payments. Total tax revenue less Social Security and other social insurance contributions. These tax revenues are paid specifically by contributors to these programs and are not available for general payments. Spending. The tax revenue data was released by the Bureau of Economic Analysis on March 28 as part of the GDP revision.
736 billion in the fourth quarter, as part of the capital gains tax has been incorporated into the estimated tax due to huge gains in stocks, cryptocurrencies and some other investments in 2023. soared to the dollar.
Tax revenues in the first and second quarters of 2024 will also skyrocket, as April 15 is the date on which high capital gains taxes for the 2023 tax year must be paid.
However, after a weak 2022 for stocks, bonds, cryptocurrencies and other investments, capital gains tax receipts plummeted in the first and second quarters of 2023. The steep decline in capital gains taxes in the first and second quarters of 2023 did not reflect the spike in capital gains taxes that followed the Fed-led asset price spike in 2020 and 2021.
Regular income tax revenues will continue to rise due to rising wages and salaries (wage inflation) and employment growth.
Interest payments (green in the graph above).
Interest payments are skyrocketing for two reasons: rising interest rates and ballooning debt.
Inflation has rebounded significantly for the first time in decades, and rising interest rates are pushing themselves back into debt as new debt with higher interest rates is added and maturing debt with lower interest rates is replaced by new debt. ing. higher interest rates.
The government on Thursday sold 28-day T-bills at an operating yield of 5.38% and 56-day T-bills at an operating yield of 5.39%. The combined value of both stocks was a whopping $155 billion.
Yields on long-term bonds remain low. For example, in early March, the government sold $39 billion in 10-year bonds at a high yield of 4.17%.
Average interest rate on Treasury debt.
The average interest rate that governments pay on all interest-bearing debt, much of which was issued years ago at much lower interest rates than today, hit a historic low of 1.57% in February 2022. It has continued to rise ever since.
According to Ministry of Finance data, the average interest rate on government bonds rose to 3.20% in February this year. This is the highest since 2010.
But clearly, given the historical context and the current magnitude of inflation, 3.20% is still a very low interest rate, less than half what it was in 2001. But this interest rate will continue to rise inexorably as old debt is replaced with new debt. Debt is rising and new debt is being added to cover deficits.
Interest payments as a percentage of GDP: The burden of interest payments on the economy.
Based on today's revised fourth quarter nominal GDP, interest payments as a percentage of GDP rose to 3.6% in the fourth quarter, the highest since 2000.
(The ratio is calculated apples-to-apples: quarterly interest expense in current dollars, not adjusted for inflation, not seasonally adjusted, not annualized, divided by quarterly nominal GDP of $6.93 trillion in current dollars, not adjusted for inflation.) , not seasonally adjusted or annualized).
So this is a sharp rise from very low levels and is still quite a distance from the nightmarish levels of the 1980s. But it's clearly moving very fast in the wrong direction.
inflation…
Inflation also pushes up nominal GDP (not adjusted for inflation). Nominal GDP in the fourth quarter increased by 5.7% from the previous year. Inflation increases wages and salaries. The average hourly wage at the end of 2023 increased by 4.5% compared to the previous year. As we have seen, inflation also inflates pre-tax business profits. And all of these factors and more have inflated tax revenues.
By inflating tax revenues, inflation helps pay down debt. And the purchasing power of existing debt is worth less. When the debt matures, the holder will be repaid in devalued dollars. In this way, sufficient inflation over time reduces the debt burden even if interest payments increase over time due to higher interest rates.
What is important is not just interest payments, but the ratio of interest payments to tax revenue.
So we know that this reckless fiscal policy today will lead to higher inflation and higher interest rates for years to come.
Yield solves the demand problem, but it comes at a cost.
The government sells untold amounts of new bonds every week. On Thursday, before the market closed for Easter weekend, they sold $155 billion in 28-day and 56-day T-bills. Someone has to buy this bond, and if interest rates fall at the current yield, there will be new buyers at higher yields, and those buyers will buy everything they want, and no buyers at that yield will materialize. And yields will rise further until more buyers appear. .
As we've seen, when the 10-year Treasury yield approached 5% last October, there was huge demand, and that demand pushed yields down. That's what Yield is for, that's what it does, and making sure it's done effectively and that there's demand.
So it's not a question of not having enough buyers. Until all Treasury securities are sold, there will be enough buyers as yields rise to attract buyers. However, the problem is that rising yields cause higher interest payments.
The curse of easy money.
The Fed's interest rate restraint from 2008 to 2022 was achieved through near-0% policy rates and years of quantitative easing, with near-free government borrowing, near-0% yields on Treasury bills, and long-term The yield has dropped to 0%. very low level. Low interest rates encourage borrowing. Everyone loves free money, but no one loves free money more than Congress. And the interest payments were so low that debt wasn't really a problem. However, huge debts are now a problem.
This debt overload by Congress was the result of the Fed's reckless monetary easing policies that began in 2008 with interest rate suppression and quantitative easing. But now, easy money has turned into a curse, with the worst inflation in decades and a massive unresolved debt problem.
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