Nothing Left

When Gov't Interest Costs Devour Your Taxes and Pave the Way to Runaway Inflation

Earlier this week, I wrote to you that the U.S. debt crossed $36 trillion, and net interest costs are already at nearly $1 trillion.

And as I said, people are starting to notice. For instance, you might have seen this recent tweet from Elon Musk.

Musk is, of course, spot on.

If you take a look at Table 2 of November’s “Monthly Budget Review: Summary for Fiscal Year 2024” from the Congressional Budget Office (CBO), you'll see two big numbers for government revenue: $2.426 trillion and $530 billion. These are the amounts the government collected from individual income taxes and corporate income taxes, respectively.

This means that, with a $949 billion net interest rate cost, the U.S. government is currently shelling out nearly double its corporate income tax receipts or about 40% of all income tax receipts on interest payments.

In other words, for every dollar you paid in income tax for FY 2024, 40 cents went straight to servicing the national debt. On a gross interest basis ($1.2 trillion), it would be about 50 cents, or half of every dollar you paid in.

Note: “Net interest” is the interest paid on U.S. Treasury debt held by the public, including both domestic and foreign sources. “Gross interest” also includes interest paid to U.S. government trust funds (like Social Security) and other government accounts holding U.S. debt.

So, when Musk warns that, without action on the debt, pretty much all tax revenue will go to paying interest, he’s not bullshitting you. And it’s probably because he’s also seen this graph.

As you can see, net outlays for interest on the public debt rose by $239 billion in FY 2024. That’s a staggering 34% increase over the prior year. In FY 2023, they rose just slightly less at 33%, and in FY 2022, the increase was around 29%.

That’s, of course, the effect of the Fed’s pivot in 2022, hiking interest rates ten times to fight inflation (which, ironically, they’d caused in the first place with their money-printing spree during the COVID years).

The result is that, three years ago, the rate on a 10-year Treasury bill was under 1%; but as I write this, it’s over 4%. And that 3-percentage-point increase is very dangerous.

It’s dangerous because if the current rate of debt growth continues, which it almost definitely will, the U.S. government, even with the recent rate cuts, will be paying about 30% more in net interest next year, and then again about the same increase in 2026, and so on. By then, you can bet that all of your tax revenue will be going to “paying interest, and there will be nothing left for anything else,” as Musk put it.

What's a Government to Do? 

Ok, so there are only two ways for the government to reduce its interest bill—either cut spending and pay down the debt, or bring interest rates down.

My money is on the latter, which basically means the Fed slashing interest rates all the way back down to zero. Maybe even negative.

Just think about it: if interest rates were, say, 1%, the government’s gross interest rate bill would “only” be $360 billion per year, instead of $1.2 trillion. That’s quite a strong incentive to do what I’m predicting, wouldn’t you say?

Now, as I wrote in a recent piece, I’m cautiously optimistic about Trump’s plan to dismantle government bureaucracy, cut wasteful expenditures, and restructure federal agencies. I’m all for that, and I really hope it works.

But it’s worth remembering that, as a leveraged New York real estate speculator, Donald Trump is, after all, a “low interest guy.” He regularly criticized the Fed for not slashing rates during his first term, and he’s already promised a return to lower rates during his second. Trump even said that he’d keep current Fed Chair Jerome Powell on, “especially if I thought he was doing the right thing.”

The problem is, bringing down interest rates means that the Fed would have to create a mountain of freshly pressed money—injecting literally trillions of dollars into the financial system (to reduce borrowing costs and stimulate economic activity). And guess what? That’s going to be extremely inflationary.

Remember, between 2020 and 2021, the pandemic years, the Fed added $6.2 trillion to the money supply, and we ended up with 9% inflation. And that's based on the government's own figures. If we calculate it all, inflation was probably in the double digits.

Just think, what will happen if they add ten or twenty trillion dollars to the money supply? And what happens when that occurs at the same time Trump implements his tariff policies, which will inevitably push prices up (as businesses pass those costs on to consumers like you and me).

Again, I could get behind a number of Trump’s policies, especially those that could help restore broad prosperity to the middle class. But people are mistaken when they think that these things can happen without major distortions in the markets.

The truth is that decades of woeful financial management have left our country more at risk than ever before, and the return of out-of-control inflation could just be one of those disasters lurking in the wings.

Regards,

Lau Vegys

P.S. A good way to protect yourself from this potential crisis is to convert as much government currency as you can into real money: gold. The metal's track record speaks for itself, which is why Doug Casey consistently recommends holding it in your long-term investment portfolio. For potentially greater profits, he also recommends investing in gold stocks. That's why a significant portion of our Crisis Investing portfolio focuses on these stocks, which Doug himself owns.