Horowitz: The debt bomb consuming our way of life

The GOP talking point of the month is that Speaker McCarthy secured “the LARGEST SPENDING CUT that Congress has ever voted for in history.” The reality is that nothing in the deal changed the insane trajectory of our bankruptcy. In fact, it gave Biden a blank check. Now we will suffer from a vicious cycle of debt, inflation, higher interest rates, housing crisis and personal debt, and a further reinforcement of higher interest on the national debt.

In just 10 days since suspending the debt ceiling, Treasury Secretary Janet Yellen has issued $508 billion in more debt, the fastest increase in American history. Except, unlike during the past debt limit increases, interest rates are much higher, which means that the cost of servicing this new debt will be four times as expensive as it would have been just a little over a year ago. Astoundingly, we are on pace to run a $2.1 trillion deficit this year (8% of GDP), despite low unemployment. Just wait until the recession comes knocking. What does that mean in terms of interest on the debt?

According to the Monthly Treasury Statement, net interest on the debt for the month of May was $61 billion. For the past three months, it’s been $191 billion, the highest amount in history for a quarter-year duration. In other words, in a given month, we are spending more on servicing debt than on education, transportation, and the VA combined.

At this pace, we are slated for annual interest payments topping $800 billion, as much as we spend on the military. There is no way this is not going to permanently depress the economy and also keep inflation elevated. And speaking of inflation, your bank account clearly doesn’t reflect the rosy news painted by the White House this week about decreasing inflation.

On Tuesday, the top-line Consumer Price Index numbers showed inflation stalled out at annualized rate of 4%, rising just 0.1% in the month of May. However, any stagnation or slight decrease represents a minor dip from a record high plateau. So at the end of the day, all the items that are important to our lives are much more expensive today relative to wage growth than they were before Biden took office. While wages have grown 12.5% over the past three years, shelter is up 16.4%, food is up about 20%, rent is up 23%, electricity is up 24%, utilities are up 31.5%, transportation is up 32.5%, and gasoline is up 85.7%.

Sure, it’s not quite as bad as the historic levels last year, but prices have not come down to where they should be. Also, a number of staples are still coming in hot, even according to the government’s numbers from May. Core CPI is at 5.3%. So for example, food, shelter, and transportation are up 6.7%, 8%, and 10.2% respectively.

Among the kitchen staples, relative to a year ago, the picture is not very pretty for some essentials. Here are the increases on an annualized basis:

• Bread +12.5%
• Flour +17%
• Rice +7.1%
• Lettuce +5.3%
• Baby food & formula +10.1%

In many respects, housing is the worst crisis, and it’s born out of the trap between inflation and the Federal Reserve’s rate hikes motivated by the clamor to combat inflation. Actual home prices are 38% higher than they were three years ago. But at the same time, mortgage rates have doubled. This has priced out most young couples from purchasing a house. It has also kept rent rates elevated, and they are still going up, as indicated by the CPI report. According to one study, a whopping 8 million Americans currently live in a household that is behind on paying rent.

The rent bubble will continue to feel pressure from the shortage of homes for new homebuyers, which in itself is the result of the chaotic COVID policies that induced the artificially low interest rates to then skyrocket to high rates within a year. This has created a dynamic whereby most homeowners are still locked into low rates, but new buyers would be paying double the mortgage. Consequently, many existing homeowners are staying put, which is exacerbating the housing shortage.

Overall, when the price of vital goods and services is juxtaposed to the rate of wage growth, the average American family is in the hole. According to EJ Antoni, a Heritage Foundation economist, the average family is effectively $7,200 poorer today than they were when Biden took office in January 2021.

Now, consider the fact that the cost of living vs. wage growth is this bad when we are just at the foot of the debt mountain about to consume the country. What is going to happen as the debt increases even more, creating more pressure on inflation, thereby inducing the Fed to either maintain these high rates or raise them even further? Although the Federal Reserve agreed to pause rate hikes yesterday, the agency signaled a plan to raise rates two more times this year, which will lift the funds rate to 5.5%-5.75%. Personal debt will go through the roof, and regional banks will continue to be squeezed for liquidity.

There’s a reason why the bailout for banks is expanding. We were told following the bankruptcy of Silicon Valley Bank that the Fed would not issue another bailout. So rather than calling it a bailout, officials created “The Emergency Bank Term Funding Program,” which essentially will take bank securities worth 80 cents on the dollar and value them at par. So it’s a bailout without calling it a bailout. Now, this fund has skyrocketed to a war chest of $100 billion. This bank problem will further engender a need to print more money, thereby placing even more pressure on inflation. All of these cascading economic effects are the hidden cost of the debt – all to fund woke and weaponized government.