The federal debt is a stealth tax on every American

In response to concerns about affordability, President Trump proposed capping interest rates on credit cards at 10 percent. But the federal government’s own credit card — the national debt — is already making life less affordable for all Americans. 

U.S. consumers paid $160 billion in credit card interest in 2024, averaging just under $1,200 per household. That’s a lot of money, but it’s only one-sixth as much as the $1.028 trillion we paid in net interest on the federal debt in fiscal 2025. 

At $7,600 per household, interest on the federal government’s debt costs more than the average household spent on retirement contributions ($1,991), gas ($2,411), healthcare ($6,197) or groceries ($6,224) in 2024. Even as housing costs have surged, federal borrowing is costing Americans the equivalent of three and a half months of mortgage or rent payments.

One might argue that Americans aren’t really paying $7,600 per household in interest each year, because taxes haven’t risen to cover those costs. That is true — for now — because the federal government is adding its interest costs to the debt, the fiscal equivalent of not even making the minimum credit card payment. 

But Americans are already paying higher interest rates on everything from home mortgages to small business loans to credit cards, because, as the Congressional Budget Office has explained, when federal borrowing increases, “the amount of funds available for private investment would decline (a phenomenon known as crowding out), and interest costs would increase.”   

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The Federal Reserve Now Owns 15 Percent of the U.S. Treasury Market

According to the U.S. Treasury, as of February 29, 2020, there was $16.9 trillion in marketable U.S. Treasury securities outstanding. Of that amount, at the end of February, the Federal Reserve held $2.47 trillion or 14.6 percent – making it, by far, the largest single holder of U.S. Treasuries anywhere in the world.

By this past Friday, the Fed’s ownership of the Treasury market had increased to $3.12 trillion. It had grown by an unprecedented $650 billion in one month’s time. And on March 23, the Fed announced that it would buy unlimited amounts of both Treasury securities and agency mortgage-backed securities “to support smooth market functioning.”

But exactly how can a so-called “free market” function smoothly if the country’s own central bank is cornering the market. Salomon Brothers paid a $290 million fine and came close to getting slapped with criminal charges by the U.S. Department of Justice in 1992 for manipulating prices in the Treasury market. And make no mistake about it, the Fed’s massive purchases are having a demonstrative impact on driving up prices in the Treasury market while driving down yields – meaning the income that determines if senior citizens in America can buy real groceries or have to live on one pot of soup for the week.

At the end of 2007, before the Wall Street crash in 2008, a senior citizen could invest $10,000 in a 10-year Treasury note and get $400 a year in income, or 4 percent. Today, that same $10,000 generates just 0.67 percent or $67. Seniors who were living on their Treasury income have experienced an 83 percent drop in income while food costs and pharmaceutical costs have soared.

If the Fed keeps up this pace of Treasury buying, it will own the entire Treasury market in about 22 months. If you look at the New York Fed’s list of the Treasury securities that are being submitted to it for sale by Wall Street’s trading houses versus the amounts the New York Fed is buying, you will see that Wall Street is puking up Treasuries in something akin to projectile vomiting.

This is clearly another one of those unanticipated consequences of a corporate-controlled Senate that passed the massive tax cut for corporations and the one percent in December 2017 and created a $1 trillion+ deficit as far out as the eye can see with no plan for who was going to buy all of the gargantuan amounts of Treasury debt that had to be issued as a result.

Because yields on Treasury securities have collapsed by 83 percent since the financial crash, investors, including risk-adverse senior citizens, have been driven into the stock market in order to capture the higher dividends paid on stocks. That’s also been great for the richest top 10 percent of Americans who own the vast majority of the stock market.

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In Search of the Effective Lower Bound

The Fed is no longer talking about zero-bound but effective lower bound. What's the difference? Where is it?

Read it here.

Fasten your seat belts please...

Wall Street October 1929

A wave of selling swept through most of the world's financial markets yesterday while the US markets were closed for the M L King holiday. Today the selling in Asia became something close to an outright panic. As of this writing the European markets after an initial wave of frantic selling have stabilized and seem to be holding their breath, waiting for an indication of what will happen when the US markets open in a couple of hours. Barring an emergency and very deep rate cut by the Federal Reserve be prepared for a blood bath. Dow Futures are down over 500 pts.

The sell off has been triggered by growing fears that the US economy is heading into (or may already be in) a nasty recession. Many foreign banks hold massive amounts of American debt (bonds), some of which are probably going to be bad. There is a growing fear that the U S Government may be limited in it's ability to respond to the growing economic crisis. Heavy debt at all levels of American society from private consumer debt (credit cards & high interest mortgages etc.) to corporate and national government are weighing heavily on the economy now. Ever since George Bush took office the United States has been living on the national credit card, with deep cuts in taxes and large increases in spending to finance a shocking amount of pork and two wars. The result is that the national treasury is depleted and we have been receiving warnings that our our country's bond rating could be reduced from the AAA status it has held since 1917 to AA.

In order to finance the wars and ensure that the wealthy are not inconvenienced by higher taxes the US has been borrowing money at record rates (most of those bonds are held by foreign banks) and we have been printing more money. If you or I decided to print money to solve our financial shortfalls we would go to jail. However the Treasury Department does not operate under the rules the rest of us have to follow.

The only problem with this is that money is not immune to the basic laws of economics. The more you have of something, the less it's worth. Case in point; our money (no longer backed by gold for very good reasons) is today backed by public confidence. For decades the dollar has been the store of value in the international financial markets and the de facto currency of international finance. In short term emergency situations you can (and should ) print more money to help give a boost to the economy or keep the lights on at the government. This is perfectly OK as a temporary measure to meet an immediate and urgent need. It is not an acceptable long term answer to a knee jerk aversion to raising taxes or making politically tough decisions to cut spending. If you print more money for a long period of time you will start to loose the short term advantages and run the risk of your currency loosing its value.

Herein lies the quandary we now find ourselves in. As a general rule of thumb it's a bad idea to raise taxes or deeply cut spending during a recession. These are things you want to do during the good times so your finances are in reasonably good shape for the not so good times when you will need to use the national credit card. Also there are some things which one does not finance (at least entirely) by debt. Wars being chief among them. Since the attacks of Sept 11 2001 we have been financing two wars almost entirely through debt. At no time in the history of this country have we ever had an administration that cut taxes during war time.... until G. W. Bush. Between war spending and out of control pork barrel spending by Congress (one of the few bipartisan undertakings in Washington over the last seven years) our debt has now reached proportions that are alarming to the international financial community. Add to this the recent decline in the value of the dollar and evidence of inflation and you have the makings of a perfect storm.

Here we sit, probably in the early stages of an economic recession and the question looms large. What can the government due to help out? Yes the Fed can cut interest rates and inject currency into the markets to help stabilize things. But this runs the not inconsiderable risk of adding to inflationary pressure and further reducing the value of the dollar. Normally this would be a good time for the government to cut taxes at least short term to promote consumption and investment and increase spending in some areas in order to provide relief to people who will need some help to get through the economic tough times. But the treasury is empty. There is no rainy day fund. That was handed over lock stock and barrel to people making over a million a year in the form of tax cuts for the wealthy. We have been borrowing money hand over fist to buy bullets and body armor for troops in Iraq and Afghanistan. Where are we gong to get the money for emergency economic relief without adding to what is already an ocean of red ink?

There is a limit to how long and how much you can borrow, as any one who has ever had to live in the real world and balance their budgets can attest to, before you go over the proverbial financial cliff. So what will the government do? I am not sure. But I do feel fairly confident that they will do something. This is an election year and the appearance of being unresponsive would be political suicide. The problem is that anything that they do might be very temporary in its benefits and something we are going to pay a steep price for down the road a ways. Cut interest rates and taxes and increase spending. Those are the traditional formulas for dealing with a recession. But they are predicated on your national finances being in sound order going into the crisis. Our's are not.

The bottom line... fasten your seat belts. It's going to be a very bumpy landing.

UPDATE: The Fed authorized an emergency interest rate cut of 3/4 percent.