Fiscal Powder Keg: The Rising National Debt and its Explosive Impact on Our Future

Over the next two years, debt is anticipated to climb at an unseen rate, facilitated by the lack of a debt ceiling, effectively making the sky the limit. Unfortunately (or fortunately for bullion investors), the government's spending habits don't offer any reassurances. Clocking a whopping $500 billion every month, it appears that we're speeding down a fiscal abyss, even amidst the proclaimed spending cuts in the "Fiscal Responsibility Act". Despite the constraints imposed by the debt ceiling deal, spending remains unabated, painting the picture of ever-growing monthly budget deficits.

Sadly, the fiscal discipline required to reign in spending often wanes in the face of "emergencies". Most recently, we've witnessed Secretary of State Antony Blinken announcing a new "robust" assistance package for Ukraine. One crisis after another means our government constantly has its hand in the till, now facilitated by a limitless credit card.

Meanwhile, government receipts are in a free fall. In May, we saw a drop of 26.5% compared to the same period last year. Last year's rise in tax collections in the US, which painted a deceptive picture of financial health, is unlikely to sustain. The Congressional Budget Office has sounded the warning bell regarding declining government tax revenue, especially as the globe slips into a recession.

However, it's not just the debt's size that is cause for concern. The interest burden is snowballing at an alarming rate. The trailing 12-month (TTM) interest on the debt has risen to almost $600 billion in May, from $350 billion at the beginning of 2022. We are witnessing a $250 billion increase in annual expenses on debt service ALONE.

And this is likely just the tip of the iceberg. Every month, lower-yielding debt paper matures and is replaced by higher-yielding bonds due to the Federal Reserve's hiking cycle. With the current interest rate environment, these debt servicing costs are on track to become one of the top three federal expenses.

Let's consider the implications: if US national debt reaches $40 trillion and interest rates stay at 5%, the annual interest payments could balloon to around $2 trillion. Even if the US were to balance the budget so that receipts covered all spending except interest payments, they'd still be staring at an annual deficit of $2 trillion.

Add to that the fact that a balanced budget is currently a pipe dream. Assuming the federal government manages to maintain the current deficit level of about $1 trillion annually, we could see an annual budget deficit of a staggering $3 trillion (the current $1 trillion deficit plus $2 trillion in interest expenses).

The outlook becomes even bleaker when we consider the likelihood of increased spending and consequent budget deficits. It's sobering to note that under President Biden's administration, the national debt has soared by $4.25 trillion in just two-and-a-half years.

The national debt issue has become a fiscal powder keg, waiting for a spark. A looming global economic downturn could provide just that spark. While many view the problem as distant, it's essential to remember that the road we are kicking the can down is not infinite. Sooner rather than later, we will run out of road, and the fallout will be inevitable.

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