Federal Interest Payments May Exceed America’s Defense Budget Next Year

Federal Interest Payments May Exceed America’s Defense Budget Next Year

The Federal Reserve’s fight against inflation is pushing up the cost of U.S. debt.

During the State of the Union address, Joe Biden boasted that inflation has fallen for six straight months. Yet the United States economy is not nearly as good as the White House’s current occupant wants Americans to believe.

On February 14, the U.S. Bureau of Labor Statistics confirmed that inflation had fallen from 9.1 to 6.4 percent over the past six months. But this drop was largely driven by falling used car prices. The cost of food, gasoline and housing continue to go up, so Americans are still feeling the pinch. Disappointed by the Bureau of Labor Statistic’s lackluster results, the Federal Reserve is eyeing two rate hikes in coming months.

This is bad news for America’s biggest debtor: the U.S. federal government.

The Treasury spent $261 billion in interest payments on the national debt during the first four months of the fiscal year, a 33 percent increase over last year. And interest rate hikes will push these figures even higher. Last year, the Congressional Budget Office predicted that the government would spend $442 million in interest payments on the national debt in fiscal year 2023. But that estimate assumed that the Fed would only raise rates to 2.6 percent by the end of September. Rates are already between 4.5 and 4.75 percent and will almost certainly go above 5 percent soon. So the government is going to spend roughly twice as much in interest payments as it planned.

In other words, interest payments are set to become America’s fourth-biggest budget item.

Together, Biden’s 2023 budget and National Defense Authorization Act approved $1.3 trillion for Social Security, $858 billion for defense, $847 billion for Medicare, $536 billion for Medicaid, and $396 billion for interest payments. But if America keeps spending $2.1 billion a day on interest, as it did during the first four months of this fiscal year, it will end up spending $775 billion on interest this year. So the nation will still be spending more on Social Security, defense and Medicare than on interest, but those will be the only larger budget items unless the Federal Reserve starts slashing rates soon.

Such numbers are hard to fathom. For perspective, compare the government to a household. Slash seven zeros from the official figures, and it is like a well-to-do family that earns $463,800 a year—yet plans to spend $579,200. This family knows it will need to put $115,400 on its credit card to do this, even though it already has $3,155,700 in debt. Its total assets are only $490,000, and it is set to pay $75,000 in interest this year. Such a spendthrift family is in trouble.

Financial historian Niall Ferguson has warned that nations and empires usually fall apart when the costs of servicing their debts exceed the cost of defending their borders. The U.S. could hit this tipping point this year if interest rates keep rising. How can any government survive when it has to shell out more to its creditors than it has left for important items like protecting its citizens?

One Forbes analysis estimates that if America wants to keep its Social Security Fund and continue operating the world’s biggest military without going bankrupt, it needs to cancel all other government spending except the National Parks Service and maybe some public works. That may sound draconian, but if a family spends $579,200 while earning $463,800, any good financial adviser would tell them to cut their expenditures in half and start devoting 15 percent of their income to getting out of debt. It may be a soul-crushing experience, but it is the only path to long-term prosperity that does not involve doubling the tax burden on citizens already struggling to afford food, gasoline and housing.

“All politicians should be forced to read Genesis 41 before taking office,” Trumpet contributor Robert Morley wrote nearly 14 years ago in his article “Why Joseph Should Be in Charge of the Economy.” “So should Federal Reserve chairmen. The economic famine that grips the nation was avoidable—if those in charge had the humility to learn from Joseph. Pharaoh had had a dream of seven fat, healthy cows being eaten by seven scrawny, sickly cows. None of his wise men or soothsayers could tell him what the dream meant. But Joseph could. This humble slave told Pharaoh that Egypt would enjoy seven years of great abundance followed by seven years of famine. More importantly, he told Pharaoh what he should do: Save during the good years so the people would have food during the lean.”

America’s leaders should have saved money during the postwar economic boom. But since they did not, they will either have to save during the lean years ahead or keep running up debts until such a large portion of the federal budget is allotted to interest that they cannot afford anything else.

King Solomon wrote, “The rich rules over the poor, and the borrower is the slave of the lender” (Proverbs 22:7; Revised Standard Version). Bible prophecy indicates that Americans are destined for literal slavery if they continue down the path they are currently treading. A financial crisis is upon us, and America has not saved money to weather this storm. That means it may soon have to stop projecting power against foreign rivals like China, Iran and Russia as it struggles to avoid bankruptcy.

Weathering such an economic calamity requires grit and smart budgeting. To learn how, read our free booklets Solve Your Money Troubles! and The Financial Law You Can’t Afford to Ignore.