A quiet, corrosive, and profound financial crisis is upon us. This year, the United States Treasury will pay over $300 billion in interest payments on our debt held by the public. That amount is expected to grow to nearly $1 trillion by 2028 due to rising interest rates and growing debt principal. As it grows, this debt service cost will crowd out important Federal government expenses such as defense, infrastructure, health care, and education. While lacking the drama and media attention of recent financial disruptions, this crowd out effect is materially altering the ability of our Federal government to do its job. We require a strong bipartisan commitment to reigning in the debt and dramatically slowing the growth in this debt service cost.

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A financial crisis can strike swiftly. Several catalysts in 2000-2002 devastated equity and high-yield debt investors over a quick 20 months. Five short years later, the housing crisis struck credit markets a crippling blow, then ricocheted throughout the banking system and global economy impacting sectors and market segments seemingly far afield.

With two catastrophic events in one decade, many investors became hyper-vigilant about potential black swan events, those rare but extreme market events that sit outside the predictive ability of conventional financial models. Having been blind-sided twice—and with many investors destroying significant capital by selling at the wrong time—they perpetually fear potentially malignant catalysts lurking in corners of the market. Auto loans. Student debt. Chinese banks. Brexit. North Korea. Tariffs.

Of course, any savvy market analyst must keep a keen eye on potential black swan events. And when such an event occurs, it will be essential to maintain objectivity and rigor while steering through that storm. However, the greatest financial challenges we face in the decades ahead are not likely to be those black swan events that demand and receive so much attention.

The Crisis is Now
The most significant financial crisis our generation will face already is upon us. In contrast to the Dot.com bubble and the Great Financial Crisis, it is slow, corrosive, grinding away at our social fabric, dragging on our economic growth, and yet only just beginning to reveal itself.

For those of us concerned with the strength of our society and of the military that defends it, the long-term crowd out of financial resources available to the Federal government represents a troubling if not catastrophic trend. As our debt service cost increases year over year over year, there simply will be fewer and fewer dollars available for defense, infrastructure, mental health, education, and all of the other responsibilities of our Federal government.

We can expect the crowd out effect to get worse regardless of who is in the White House or who controls Congress unless courageous leadership in both parties commits to addressing our most serious financial crisis: our growing debt service cost.

Debt is Real
In order to preserve our banking and insurance systems, the United States grew our total government debt from $9 trillion to $21 trillion from 2007 to 2017. Approximately $15.7 trillion of this debt is held by the public. Over the decade ahead, the Federal government’s debt held by the public is expected to grow by 83% to $28.7 trillion in 2028. Mandatory expenses like Social Security and Medicare also are expected to grow by 80% during the decade ahead (Congressional Budget Office, Ten Year Budget Projections as of April 2018, https://www.cbo.gov/about/products/budget-economic-data#3).


Source: FRED (St. Louis Federal Reserve)

Understandably, few of us can grasp what that growth in debt really means since $1 trillion is an impossibly large number. Recognize that one trillion equals a million millions and you start to get a sense of the scale.

1,000,000 times 1,000,000 = one trillion

A surprisingly large number of Americans do not think that such debt really matters. After all, some of them reason, we can simply keep printing money and adding to the debt ad infinitum. Rising interest rates, however, have made clear the real cost of our debt. According to the Congressional Budget Office (“CBO”), the nonpartisan Federal agency charged with providing budget and economic analysis to Congress, the Federal government’s total annual outlay in debt service payments in 2017 was $263 billion. The CBO anticipates net debt service growing to $316 billion in 2018, an increase of $53 billion or 20% in just one year. By 2028, the CBO expects the annual net debt interest expense to grow to $915 billion (Congressional Budget Office, The Budget and Economic Outlook, 2018-2028, https://www.cbo.gov/system/files/115th-congress-2017-2018/reports/53651-outlook.pdf).

Those debt service payments come out of Congress’s discretionary budget, the same place where Congress allocates funds for defense, transportation and infrastructure, higher education, K-12 education, national parks, research and science. In 2017, the net interest of $263 billion represented about 22% of the discretionary budget of $1.20 trillion. By 2028, the net interest of $915 billion will be about 57% of the expected discretionary budget of $1.61 trillion (Congressional Budget Office, Ten Year Budget Projections as of April 2018, https://www.cbo.gov/about/products/budget-economic-data#3).


Source: Congressional Budget Office

Even if one does not believe that the debt is real, it would be hard to argue that the $316 billion rising toward $1 trillion in annual interest payments is a financial fiction. At that level, there is little discretionary budget left for Congress to allocate. It does not matter if one is a defense hawk, believes in the power of infrastructure investment, or favors greater investment in education, the money simply will not be there.

For several years, Federal budget cuts have hit social services such as care for abused and neglected youth, services for the visually impaired, and programs for those needing mental health care. Social service agencies that rely in part on Federal funds are preparing for reduced funding today and going forward. That said, the rate of growth of our debt service cost outpaces the ability of most social service agencies to replace lost revenues from Federal sources, no matter how innovative and efficient they are.

In the face of these financial facts, some politicians and policy makers still insist that either there is no debt service cost problem or that it is easily fixed without making hard decisions. Those who argue we can just “print more money” ignore the inherently dilutive process of artificially devaluing the currency without commensurate growth stimulus. Those who assume that inflation will sufficiently devalue our debt load fail to recognize that our debt is expected to grow at 6.2% per year through 2028 and our interest payments by 11.2%. Inflation of 2 – 3% per year will never catch up. Not even close.

Others assume that our historic strength will see us through…somehow. They forget that financial sustainability is not a permanent characteristic of any nation, state, city, or company. Just because the United States has been a financial powerhouse for the past century does not mean that it is destined to remain so. Great Britain was clearly the world’s strongest economic power through the 18th and 19th centuries, but diminished growth prospects and growing debt put the UK in a terrible economic and thus geopolitical position in the early 20th century. The UK exchanged their debt owed to the US for much of their global military infrastructure and geopolitical influence. The transfer of global economic—and geopolitical—leadership from the UK to the US was not voluntary from the perspective of the UK but necessitated by the respective balance sheets and the catalyst of geopolitical crisis. Fortunately in that scenario, the US and UK were and remain staunch allies. One is not always in debt to such benevolent lenders.

The (Boring and Laborious) Solution
Like most policy challenges, the only way to slow and potentially reverse the corrosive impact of the crowd out effect requires material policy change on a number of fronts. At the end of the day, it’s just math; there are only so many levers that can be activated to drive change.

First and foremost, it is critical to raise revenue into the Federal government both to cover our growing annual debt service AND start paying down the debt. Paying down the debt requires running annual budget surpluses. If we do not build into our annual budgeting process the intentional pay-down of liabilities, then we are not addressing the problem.

Raising revenue comes from the proper balance of taxing citizens and companies enough but not too much. And while Democrats and Republicans have long argued about the right balance of how much to tax, in reality, neither party has made meaningful, lasting policy commitments to the objective of paying down the debt. Such a bipartisan commitment would be stunning and change the conversation about how we as a country steward our current and future resources.

The much harder policy change involves cutting spending. Raising taxes and stimulating growth are lovely but ineffective if we cannot also cut spending. Currently, we cut spending reactively rather than strategically. Simply put, there is no way that we can begin to afford our financial commitments given our current and projected revenue generation. Again, it’s just math. Forgetting for a moment which sectors or programs should be cut, and recognizing that the debates on this front will be passionate and hard-fought, it is long past time for a coalition of fiscally responsible representatives from both parties to commit to an appropriate and meaningful set of spending cuts. In 2010, the bipartisan National Commission on Fiscal Responsibility and Reform (aka the Simpson-Bowles commission) came as close to anything we have seen in the post-war era to making progress on this front; however, as a country we simply were not willing or ready to make those hard decisions. If we were not willing to act in the teeth of the Great Financial Crisis, then what kind of crisis will finally motivate us?

The crowd out effect is no black swan. It has been highly predictable for years, its current impact has intensified because of rising interest rates, and it is getting worse. We cannot simply blame Wall Street or Congress, nor can we sit around waiting for the problem to solve itself. And it is morally wrong to pass the burden along to yet another generation.

Politicians on both sides of the aisle and we voters who elected them are culpable for getting to this place. It has been a collaborative effort to create this dire situation and we will need brave leadership for elected leaders and the people who select them to remedy it.