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CNBC recently featured an op-ed by Peter Tanous, in which the noted author and investment advisor warns of a potential economic catastrophe that none of the 2016 election’s presidential candidates is seriously addressing.
The nation’s dire predicament, Tanous argues, is a direct result of how the extraordinary runup of the national debt during the past eight years will severely restrict how the federal government can spend money as interest rates increase from their historic, near-zero lows.
What makes his case particularly alarming is that he uses the Congressional Budget Office’s baseline scenario, which given the major candidates’ fiscal proposals, represents a best-case scenario:
The math is simple. The non-partisan Congressional Budget Office forecasts that debt held by the public will rise to $16.5 trillion in 2020. Now you may have your own views on that, since some will make a good case it will be higher. Indeed, if you look at the economic plans of both presidential candidates, most scoring exercises indicate that both will produce higher deficits. For our exercise though, let’s stick with the CBO estimate. We are postulating that the interest rate on our national debt may well return to the long-term, 25-year average of 5 percent.
Now take the CBO estimate of debt held by the public of $16.5 trillion in 2020, a 5 percent average interest on that amount comes to annual debt service of $829 billion, a staggering amount.
Let’s put it in perspective:
Individual income taxes in 2016 produced $1.6 trillion in revenue.
- Under this 2020 scenario, one-half of all personal income taxes would go to servicing the national debt.
- Debt service in 2020 would dwarf our military spending of $585 billion in 2016.
- Debt service would consume nearly two thirds of Social Security obligations.
Note: We are using 2016 numbers for comparison. It is likely that all these numbers will be higher in 2020 but the proportions will likely be similar or worse.
These numbers are staggering, all the more so because the assumptions we use are eminently reasonable and predictable. This trend is the consequence of our failure to pay enough attention to the national debt and the effect of rising interest rates. Who will tell the American people that in a couple of years, over half their income tax payments will go to pay interest on the debt to Japan, China and all the others who buy American bonds? Who will tell the American people that that the debt service we pay will be far greater than our expenditures for the military?