It passed by with little ceremony. The national debt reached $40 trillion. That is a huge number, but like all things huge and unimaginable, it is abstract. The tendency is to treat it like any number. It is almost an arbitrary marker, little different from any number that came before or what will follow.
In daily life, most people hardly noticed the difference. There was no crash or run on the bank. Everything seemed normal enough, even though future generations will have to pay for this debt. Most people were content to keep kicking the debt can down the road. They only hoped that the can would not turn into a grenade and explode on their watch.
Despite the lack of reaction, one thing is evident: the price of borrowing has gone up. This milestone did serve as a reminder that government borrowing is not risk-free.
The Demise of Free Money
Gone are the days of what was called “modern monetary theory (MMT)” a few years back. This theory held that, since interest rates were hovering around zero, the government could borrow as much as it wanted, because it was “free” money that could be repaid with more free money indefinitely. There was no cost to the taxpayer as the government could do the equivalent of kiting credit cards, paying one off with another without paying the penalty or interest.
Rep. Alexandria Ocasio-Cortez (D-N.Y.) was a main proponent of the MMT because she saw it as a way to finance the Green New Deal, universal health care and other grand socialist schemes. However, like Woke 1.0, MMT in today’s financial climate is crazy. No one is talking about this “woke” money anymore, although government spending continues unabated.
How Free Money Fails
The problem with free money is that it eventually ends, since it depends on people’s willingness to buy the debt that finances it. When money is plentiful, investors need a safe place to park their funds and will accept low or near-zero interest on secure bonds.
However, when credit tightens, investors find competing claims for their money with better profit opportunities. Interest rates on loans go up, and government treasuries follow the market. The current rate on long-term 30-year bonds is around 5.15%.
When this happens, money is no longer “free” (it never was). Taxpayers are stuck with interest payments, which are now over a trillion dollars—more than the defense budget or Medicaid. And with this year’s deficit projected at $2.3 trillion, there is no end in sight to rising interest rates.
With no desire to curb government spending, the rise in Treasury yields causes some discomfort. It is what investor Stanley Druckenmiller called “the only fiscal disciplinarian the U.S. has left.”
The $40 trillion milestone also puts doubts in the minds of investors worldwide, suggesting that American bonds have reached a point of risk, not security. The whole system, built up over decades, becomes endangered.
Impact on Daily Life
The government is not the only one impacted by the price of debt. The situation threatens the daily life of Americans. It is hurting those who want to achieve some basic goals that Americans used to take for granted, such as housing.
When interest rates on treasuries go up, mortgage rates follow suit. The rate on 30-year home loans now hovers around 6.5%. As Carol Ryan of The Wall Street Journal put it, the “$40 trillion tab is living rent-free in your mortgage payment.” The increased cost of treasuries directly affects mortgage payments.
When buying a house gets more expensive, home sales inevitably suffer. Fewer houses get built and sold. Builders and construction workers likewise suffer as the pain trickles down. America is suffering from a freeze in house sales that is now in its fourth year.
Thus, housing is becoming unaffordable for many Americans. Each uptick in debt as a share of gross domestic product can add as much as another $10,000 to $15,000 to the average home price. The present deficit of 6% of GDP weighs heavily on Americans struggling to establish themselves in a difficult economic climate. Other areas of the economy are likewise impacted.
It all started with free money that wasn’t free. It’s time to go back to responsible spending within the nation’s means. The $40 trillion milestone is a painful reminder that monetary honesty is the best policy.
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