The Overgrown Deficit. Click to keep reading…

The Overgrown Deficit. Click to keep reading…

In the aftermath of the pandemic, the national debt is soaring. The trillions of dollars in stimulus spending that has been approved by Congress drove the debt level to 108% of the U.S. GDP. Projected additional spending will drive the debt to 114% of GDP by next year. This level tops the previous high record established after World War II (at 106%).

There’s more bad news on the horizon as baby boomers start to retire and begin drawing Social Security and Medicare. If Congress extends the enhanced child care credit, or the tax cuts that are set to expire in 2025, the debt could hit 130% of GDP in 2026. Expect interest costs to rise as debt rises. Debt service accounts for 5.3% of federal spending, but may rocket to 17% of the budget by 2031. Without serious attention to curtailing the debt, the amount becomes staggering. It’s projected as high as 260% of GDP by 2050, and 600% by the end of the century.

Most of the deficit spending is financed by the Federal Reserve Bank. Japan is the top foreign lender (at about 6%). The burgeoning debt forces the Fed to walk a tightrope. They must keep interest rates low to finance the deficit, while hoping inflation stays in check. If not, interest rates will rise, producing consumer price increases and credit woes for borrowers.

No matter what, Kiplinger expects that inflation will increase while interest rates will stay lower than normal. Cheap credit, rising prices, an incentive to borrow combined with less reward for saving. Food for thought as the economy rides out the post-pandemic waves.–Kiplinger Letter (3o April 2021). Vol. 98, No. 17.

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