Congress Gifts Taxpayers More Debt
Ahead of the Christmas holiday, Congress gave taxpayers the gift of a 4,155-page, pork-laden $1.7 trillion spending bill. It will add to the ballooning $31.4 trillion national debt and hasten the country's lurch toward a fiscal and monetary crisis.
The U.S. debt to GDP ratio of 120% already stands at its highest level since the end of World War II. If GDP turns negative again in 2023, as many economists predict, Uncle Sam's debt predicament would become even more dire – especially if borrowing costs continue to rise.
Servicing costs on the national debt are set to skyrocket.
Interest on the national debt will cost the government $475 billion this year, a significant jump above the $357 billion initially projected by the White House.
In the years to come, interest payments alone could cost trillions of dollars per year.
According to the Peterson Institute for International Economics, interest on the debt will account for nearly half of all federal tax revenue 30 years from now – unless the current fiscal trajectory changes.
But more spending and more borrowing remains the path of least political resistance in Washington. The $1.7 trillion spending bill was rammed through Congress with the help of Republicans including Senate Minority Leader Mitch McConnell.
Fellow Kentuckian Rand Paul blasted the spending spree as an “abomination.” He cited nearly $500 billion in wasteful spending, including “a steroid-induced hamster fight club, a study to see if kids love their pets, and a study of the romantic patterns of parrots.”
Senator Paul was joined by fiscal conservatives and former President Donald Trump in blasting McConnell for his support of the omnibus bill.
Republicans will re-take control of the House of Representatives next year, but they will only have a slim majority. The Senate, meanwhile, will remain under Democrat control – with only handful Republicans in the minority willing to put up a fight on spending and borrowing.
Will reckless fiscal policy lead ultimately to a debt default? Probably not.
Big spenders in Washington know that under our fiat monetary system, a default can always be averted through the central bank's unlimited ability to create new currency and purchase government bonds.
“There's no reason for us to default because we can always print more money, so I think the bigger risk is high levels of inflation,” Maya MacGuineas, president of the Committee for a Responsible Federal Budget, told the Washington Examiner.
Regardless of the Federal Reserve's tough talk on inflation, it will ultimately have no choice but to facilitate expansionary fiscal policy.
The Fed may now be approaching the upper limit of how much it can raise interest rates given the protests from Washington and Wall Street.
Markets are pricing in a strong chance that central bankers will reverse course at some point next year and begin cutting rates again. Weakness in the U.S. dollar and strength in precious metals markets in recent weeks suggest that monetary policy is indeed headed toward loosening.
More spending and more debt mean more currency creation. It doesn't bode well for holders of dollar-denominated debt instruments. But it does bode well for holders of gold, silver, and other hard assets.