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The magnitude and speed of the ratio’s 2-year spike is unprecedented in modern US history. It does not look good.
By Wolf Richter for WOLF STREET.
What matters the most in terms of the horribly spiking interest payments on the national debt that has exploded to $36.1 trillion by now is their relationship to the tax receipts to pay for those interest payments.
This ratio of “interest payments to tax receipts” jumped to 37.8% in Q3, the highest since 1996, when this ratio was on the downtrend from the scary times in the 1980s, based on a measure of tax receipts released on Wednesday by the Bureau of Economic Analysis as part of its second estimate of Q3 GDP.
The ratio illustrates to what extent the national income that is available to pay for general budget items is being eaten up by interest payments. The magnitude and speed of this spike is unprecedented in modern US history. It does not look good:
Interest payments by the government on its gigantic and ballooning pile of debt surged by $37 billion year-over-year, or by 15%, to $279 billion in Q3 (red in the chart below).
Tax receipts by the federal government in Q3 rose by $29 billion year-over-year, or by 4.1%, to $740 billion (blue).
Tax receipts can spike and plunge with capital gains taxes. Surging financial markets trigger a tsunami of capital gains, and therefore capital gains taxes to be paid the following year by April 15 – which means that those capital-gains tax receipts occur in Q1 and Q2.
- The surge in tax receipts in Q1 and Q2 2022 was driven by capital gains taxes paid on the phenomenal Fed-money-printer year 2021.
- The year 2022 was crummy for markets, and so tax receipts in Q1 and Q2 2023 plunged.
- The start of the recovery of the markets in 2023 caused tax receipts to be higher in early 2024 than in 2023.
- The massive gains in the markets so far in 2024 will trigger big capital gains receipts in Q1 and Q2 2025 (and Trump’s policies will get credit for it, but that’s how it goes).
Tax receipts over the longer term increase through growing incomes, growing employment and wages (more workers earning higher taxable wages), growing profits by businesses, and bubbly financial markets. Inflation is a big factor in inflating tax receipts by inflating taxable incomes and profits of all sorts.
This measure of tax receipts from the BEA tracks what’s available to pay for regular government expenditures, such as interest payments. Excluded are tax receipts that are not available to pay for general expenditures, primarily tax receipts from Social Security and other social insurance programs that are paid for by participants in the systems and are distributed to beneficiaries of the systems.
Interest payments have surged because…
The debt has ballooned at an astounding pace year after year, for many years, including by $2.1 trillion so far in 2024 even during this strong economy. At the end of Q3, the time frame here, the debt had reached $35.5 trillion (now already at $36.1 trillion).
The higher interest rates are entering the debt as new securities are issued to fund the additional new debt, and as old lower-interest-rate Treasury notes and bonds mature and are replaced with new Treasury notes and bonds that carry a higher coupon interest rate. Short-term interest rates enter into the debt very quickly as Treasury bills (terms of one year or less) mature quickly and are replaced with new T-bills at the new rates. There are now over $6 trillion in T-bills outstanding.
The ugly Debt-to-GDP ratio: Total debt as percent of GDP rose to 120.8% in Q3, based on the second estimate of Q3 GDP released by the BEA on Wednesday, after the slight dip in Q2.
The spike in Q2 2020 was the result of the collapse of GDP during the lockdown while the national debt to pay for the stimulus programs exploded. From Q3 2020 through Q1 2023, GDP recovered faster than the debt rose, and the debt-to-GDP ratio declined. But in Q2 2023, the trend reversed as the debt surged faster than GDP rose.
For your amusement, also check out the Debt-to-GDP chart going back to 1966 that we duct-taped into the comments below this article.
The fiscal mess the US has been wallowing in for many years that caused the national debt to explode to $36.1 trillion by now is a long-term problem – encouraged and enabled by the Fed’s free-money policies from 2008 through 2021. It’s called “unsustainable,” even by Powell, because over the long term, it cannot be sustained. Something will happen to address it. Either Congress addresses it. Or inflation addresses it. or both. The US, which controls its own currency, cannot default on its debt, but it can get embroiled in higher inflation, and in higher long-term interest rates that result from this higher inflation. And the US is already well on its way, embroiled in inflation that has now become stubborn.
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The post Federal Government Interest-Payments-to-Tax-Receipts Ratio Spikes, Debt-to-GDP Worsens Further in Q3 appeared first on Energy News Beat.
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