$2.4 Billion a Day

The Federal Interest Payment Crisis

Today, while browsing social media, I came across this snippet from a recent Elon Musk podcast. Have a listen.

For those who prefer reading, here's the transcript:

Like, what are the things that I think are important? You know, I think we want a secure border. We don't have a secure border. We want safe and clean cities. I think we want to reduce the amount of spending or at least slow down the spending. And because we're currently spending at a rate that is bankrupting the country, the interest payments on U.S. debt this year exceeded the entire Defense Department's spending.

If this continues, all of the federal government taxes will simply be paying the interest. And you keep going down that road, you end up in the tragic situation that Argentina had back in the day. Argentina used to be one of the most prosperous places in the world. Hopefully, with Milei taking over, he can restore that. But it was an incredible fall from grace for Argentina to go from being one of the most prosperous places in the world to being very far from that.

So I think we should not take American prosperity for granted. We really want to, I think, we've got to reduce the size of government, we've got to reduce the spending, and we've got to live within our means.

Love him or hate him, Musk stands out as one of the more clear-headed billionaires – if such a thing exists. And his points here are spot-on.

I also appreciate his parallels with Argentina, which we've covered extensively in previous articles (catch up here and here).

But let me update Musk's numbers here. The latest Treasury figures are in, and they show that net interest payments hit $882 billion for this fiscal year through September. That's about $2.4 billion every single day.

This means net interest payments on U.S. debt have not only passed Defense Department spending, but they’ve also exceeded Medicare’s $874 billion cost (see Page 4). In fact, they’re higher than what the government spends on education, veterans, and transportation combined. See the chart below.

I'm focusing on net interest payments here because they also account for any government earnings on interest – it's just a more accurate way to look at it. The gross figure, mind you, sits at about $1.2 trillion.

But even this adjusted $882 billion figure already makes up 3.06% of America's GDP – something we haven't seen since 1996.

As I’ve mentioned plenty of times, both here and elsewhere, this debt crisis is the result of reckless spending and budget deficits that neither political party seems eager to address.

The problem won’t go away as long as politicians keep borrowing to fund programs that serve a select few, with little benefit to the public. Keep in mind, the national debt is closing in on $36 trillion — nearly 130% of GDP.

But Wait – What About... ?

But then some people will inevitably ask: “Do we really need to worry? What about Japan?”

They're referring, of course, to Japan being significantly more indebted than the U.S. — more than twice as much relative to GDP — and supposedly "doing fine.

Except it's not doing fine at all.

Japan's economy has stagnated for decades, with flat wages and a stock market that's only now reaching its late 1980s values. Once an economic powerhouse, Japan is now a mere shadow of its former self.

But here's an even more important point: Japan has over 90% of its debt owned domestically. When you owe money to yourself, you have a lot more room to maneuver.

While this was also true for the U.S. in the 1970s, our dependency on foreign lenders has since skyrocketed. Take a look at the chart below.

Right now, foreign nations hold about 30% (~$10 trillion) of U.S. government debt.

Now, the chart above doesn’t show this, but that’s actually the largest chunk of all holders, surpassing both the Fed and mutual funds (~$5 trillion each) and individual investors (~$3 trillion), not to mention smaller players like regional banks.

The point is, it isn’t just “money we owe to ourselves,” as Nobel Prize-winning economist Paul Krugman once (in)famously put it.

That’s a big problem because the U.S. can’t expect foreign buyers to keep playing nice and buying up its debt endlessly. That gets even trickier when the U.S. isn’t exactly playing nice either, and its debt-to-GDP ratio surpasses Cape Verde’s.

Just look at China.

This economic powerhouse used to be our biggest debt buyer. But by 2019, ceded the position to Japan. And after trade wars and Russian sanctions, China's appetite for U.S. debt fell off a cliff.

In fact, they've sold off $266 billion in U.S. Treasuries just in the last two years. That's a startling 26% drop.

And China isn't alone. Even traditional allies like Belgium and Switzerland are quietly selling billions in Treasuries.

If the U.S. continues on its current debt trajectory, soon all federal tax revenue will go toward paying just the interest. When that happens, you can bet more countries will follow suit because this situation is simply unsustainable.

So what's a government to do?

Default? Not a chance – that's political suicide for anyone in power.

That leaves just one escape route: devalue the dollar (and with it, the government's debt).

Regards,

Lau Vegys

P.S. Many think currency devaluations only occur in economically weak nations or places that are still developing, like those in Africa or Latin America. However, later this week, I’ll explain why it’s the only option left for America’s power brokers. Stay tuned.