Fact check true: For the first time in history spending on interest will exceed spending on defense.
Do We Spend More On Interest Than Defense?
The Committee for a Responsible Federal budget did a Fact Check on that question. The answer is yes.
During a recent town hall, former United Nations Ambassador and current Presidential candidate Nikki Haley claimed, “for the first time we’re paying more in interest payments than we are on our defense budget.”
This statement is true. According to the Congressional Budget Office’s latest baseline, in Fiscal Year (FY) 2024, spending on interest is projected to total $870 billion, while spending on national defense will total $822 billion. This has never been the case before, going back to at least 1940.
Net interest spending nearly doubled from FY 2020 to 2023, rising from $345 billion to $659 billion. As a share of the economy, interest grew from 1.6 percent of GDP in 2020 to 2.4 percent in 2023. This year, interest is projected to rise to 3.1 percent of GDP and will exceed its record – 3.2 percent set in 1991 – in 2025.
In addition to breaching defense spending, interest costs are expected to exceed Medicare spending this year, making interest on the national debt the second largest line item in the FY 2024 federal budget, behind only Social Security.
Looking ten years ahead, the CBO projects Medicare and interest on the national debt will each exceed $1.6 trillion.
Bear in mind none of these figures price in a recession, ever.
My assumption is deficits will rise much more than expected in periods of recession. In turn this will add to national debt and thus interest on national debt.
As for defense, many thing that could be included in that category such as veterans benefits and homeland security are buried elsewhere. Even without such things factored in, both Democrats and Republicans are pushing for more military spending already. And what if there is a war?
The CBO Revised the Cost of Biden’s Energy Policies Up by $466 Billion
Meanwhile, the cost estimate of Biden’s Inflation Reduction Act coupled with EPA mandates, just jumped by $466 billion.
For details, please see The CBO Revised the Cost of Biden’s Energy Policies Up by $466 Billion
The GOP Supports a Child Tax Credit Boost and Affordable Housing Expansion
On January 17, I asked How Much Will That GOP Deal on Child Tax Credits Really Cost?
We have a new number on the deal the House Republicans agreed to. It’s $1.5 trillion over ten years. That does not include an Affordable Housing giveaway.
Pathetic.
What’s truly sad, is that so many Americans have been so thoroughly indoctrinated into total economic illiteracy; that they will, when the day of reckoning comes, fall for the utter idiocy that it will be “better”; or a “lesser evil”; to pay creditors by cranking up debasement mediated robbery even further; than to simply say “We f’d up. Borrowed too much. Can’t afford to pay. So, we won’t”; and then hard-default with a raised middle finger.
The latter is; with zero exceptions whatsoever; a MUCH, MUCH, MUCH preferable way to deal with debt one cannot pay. But, I’m sure: Leave it to the #DumbAgian indoctrinati to get that one wrong as well. On top of everything else they’ve gotten nothing-but wrong.
Americans would prefer to watch Sunday football rather than worry about economics. What amazes me is that so many Nobel prize winning economists are not worried about the US repeating the mistakes of Weimar Germany.
Lowering interest rates won’t ameliorate the problem. Existing government interest debt is fixed when long-term bonds were created. Otherwise 10 years of effective zero rates would have reduced debt, when long-term bonds matured, and rolled over at historically low rates. Mortgage refinance was intended to save households money. But, as financial commentator Dave Ramsey said: “people spend to keep their level of debt constant”. Government does the same. Biden declared during last year’s debt clash: “we are spending money we saved”. As rates fall closer to zero, corporations take on riskier investments. And liberal government squanders on progressive ventures.
Albert Einstein once said “Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it”. The USA is bankrupt and no one talks about changing that. The Greeks were right in their Golden Age to use a lottery of land owners (skin in the game) to fill their Senate every year.
What irritates me about opinions like this is, the incomplete analysis. Medicare is also known as the Hospital Insurance Trust. Like the O.A.S.I. Trust (aka “Social Security”) it is NOT part of the general revenue. Both the O.A.S.I. and Hospital Insurance Trusts have separate and distinct balance sheets from general revenue flowing into the TGA. As anyone who has ever received a paycheck knows, tax withholding (TGA), social security (OASI) and medicare (Hospital Insurance) are each separate and distinct deductions for this very reason. I love your stuff but, c’mon Mish! Your analysis looks at Medicare as if it’s part of the general revenue. You completely avoid discussing whether the cash flow into medicare (with each and every paycheck cut) falls short of that separate stream and if it has to be augmented by general revenue from the TGA. If it’s not augmented, then lets look at the foolish spending and failure to generate general revenue. Lastly, please keep in mind that medicare, like O.A.S.I. is a TRUST. A public TRUST and that TRUST funds have been inappropriately taken by both parties going back to the Reagan era.
Please note there is no trust (at least there shouldn’t be) and there certainly isn’t a Fund. SS and Medicare receipts have all been spent and then some.
What is it about this you fail; to understand?
Nice speech,, but in the real world social security and medicare taxes are just dumped in with general revenue and spent.. then we borrow a trillion or so and spend that also….
And no matter the source of revenue, we are in fact going to spend more on Medicare than Defense….
And make all the arguments you want, we are headed for one heck of a fiscal problem.
And also remember,, Nothing Goes to Heck in a Straight Line…
FICA taxes have been consolidated with other Federal revenues ever since LBJ decided that it would make the Federal budget look better.
What if they wrote off the debt held by the Fed? The Fed created money to buy it, so why should that debt exist? What would be the implications of writing that debt off?
The implications of writing off the debt is that it would make the US have a balanced budget. No more deficits, because our credit would be shot. That’s not exactly a bad thing. But the bad part would be that any person or entity holding Treasuries, would lose bigly because the bonds would no longer pay interest, nor would they pay 100% or principal back. Short term bond funds are held by brokerage houses and used to hold “cash” as they are buying and selling equities. That would get wiped out and upset equity markets. Lastly, a default so large would put the banks at risk. Your holdings at the bank might get wiped out. Definitely a loan would have a high interest rate.
I assume you mean the Fed writes it off.
In accounting terms it would wipe out most of the assets that offset the Fed’s liabilities so the Fed would be running with a huge negative equity position. Despite claims to the contrary it does not mean they would be bankrupt, but there is at least one major issue that arises.
By law the FRBs must hold collateral equal in value to the notes they place into circulation. Wiping out the Treasuries would greatly hamper their ability to issue cash to commercial banks. It would also mean they have little to no collateral to back existing notes in circulation. This legal requirement could be changed (or ignored), of course, but that is how it currently works.
The Fed’s assets also generate the vast majority of the income used to cover their operating costs which, thanks to the current interest on reserves rate versus the Fed’s holdings, isn’t covered now anyway. Under lower rates most of the interest went back to the Treasury.
The biggest impact would be the limitations the loss of the securities have on monetary policy options. Currently QT is slowly draining money and reserves out of the system as the Fed lets debt run off without replacement. Wipe out the debt and it greatly reduces or eliminates their ability to drain money and reserves from the system that they previously added.
Isn’t Medicare and interest just a bunch of transfer payments ? Electronic money can be created.out of electrons and only requires a computer.
The solution to high interest payments on our debt is simple – just reduce the interest rates back to near ZERO!
Mish uses the oldest accounting trick in the book, funding lines, to hide the fact that interest expense on military expenditures paid with debt is defense spending. Telling the truth, America’s worthless “defense” spending is now costing taxpayers everything and nothing will change until . . .?
Look clown – It would help if you could read.
“As for defense, many thing that could be included in that category such as veterans benefits and homeland security are buried elsewhere. Even without such things factored in, both Democrats and Republicans are pushing for more military spending already. And what if there is a war?”
Yes that list also includes interest.
Is interest expense included in your rude retort? I don’t see it. Have a nice day.
We could also roll in the cost of policing which in the US is bout 2% of GDP and is on par with New Zealand. Veteran Affairs would be 1% more of the GDP.
It isn’t really a defense budget. It is an empire military budget. An empire spends far more money on military than an entity simply spending for its personal defense.
Social media, MSM, diplomatic pressure, weaponizing the US dollar are all tools for empire “military” budget whatever that is. No longer to armies need to invade countries as a means of change, influence, etc. The complex is certinaly corrupt, don’t get me wrong. But, your obvious personal bias towards the military budget is very uniformed about national security strategy and goals. Military budget spending used as a primary scapegoat’s for debt and deficit problems is illogical.
‘A rose by any other name would smell as sweet’.
If the commercial bankers are given the sovereign right to create legal tender, then the DFIs must be severely circumscribed in the management of both their assets and their liabilities – or made quasi-gov’t institutions.
(1) The great German poet and playwright Bertolt Brecht would have agreed and once said it was “easier to rob by setting up a bank than by holding up (one).”
(2) As Willie Sutton said: his reason for robbing banks is ‘That’s where the money is’.
(3) Thomas Jefferson’s my favorite: “I sincerely believe the banking institutions having the issuing power of money are more dangerous to liberty than standing armies.”
Contrary to Powell, banks aren’t intermediaries. Every time a commercial bank buys securities from, or makes loans to, the nonbank public, it creates an equal volume of demand deposits, somewhere in the payment’s system. I.e., deposits are the result of lending, and not the other way around.
See Primer: A Deposit’s Life
link to fedguy.com
See Richard Werner
link to youtube.com
We can get rid of of all the debt in America overnight -change the definition of debt. IYKYK
The ECB has the right idea:
link to bnnbloomberg.ca
And the FRB-STL also has the right idea:
link to files.stlouisfed.org
The only tool, credit control device, at the disposal of the monetary authority in a free capitalistic system through which the volume of money can be properly controlled is legal reserves. Powell eliminated legal reserves in March 2020. And Powell also eliminated deposit classifications. Monetarism has never been tried.
Dr. Daniel L. Thornton, May 12, 2022:
“However, on March 26, 2020, the Board of Governors reduced the reserve requirement on checkable deposits to zero. This action ended the Fed’s ability to control M1.”
Under monetarism, the first rule of reserves & reserve ratios is that all money creating, depository financial institutions (DFIs), should have the same legal reserve requirements, both as to types of assets eligible for reserves, as well as the level of reserve ratios.
There is no reason for differential reserve requirements in the first place (something Nobel Laureate Dr. Milton Friedman advocated, December 16, 1959).
Policy should limit all reserves to balances in the Federal Reserve banks (IBDDs), & have UNIFORM reserve ratios, for ALL deposits, in ALL banks, irrespective of size.
In 1931 a commission was established on Member Bank Reserve Requirements. The commission completed their recommendations after a 7 year inquiry on Feb. 5, 1938. The study was entitled “Member Bank Reserve Requirements — Analysis of Committee Proposal” its 2nd proposal: “Requirements against debits to deposits”
link to bit.ly
After a 45 year hiatus, this research paper was “declassified” on March 23, 1983. By the time this paper was “declassified”, Nobel Laureate Dr. Milton Friedman had declared RRs to be a “tax” [sic].
Change the law that says all new money created by the FED and the government must be debt/bonds, and distribute money directly into the economy at retail sale to compensate merchants giving consumers a 50% discount on pricesand at point of loan signing that reduces debt. This ends inflation forever, doubles everyone’s purchasing power, potentially doubles the demand for every enterprise’s goods and services and transforms the economy from a continually stressful experience into an opportunity to self actualize gratitude.
Solve problems by destroying orthodoxies, you’ll be more free and happier.
And it’s obvious that the burden of higher interest rates will be compounded. The burden becomes a function of the major portion of the debt, not just the current deficits. The burden, in fact, becomes exponential. In other words, if the trend is not stopped, the debt inevitably has to be repudiated.
“The era of big government is over.”
— Bill Clinton (1996)
Just in time for a new era to begin.
@Bam_Man….
Yes, the era of Big Government ended under Bill Clinton.
What followed was the era of Massively Gargantuan Government.
We had a debt bubble in 1929, and the Great Depression liquidated a lot of that debt in bankruptcies, insolvencies and companies simply going out of business. 40% of our banks failed. This country runs on credit so when the debt service costs go up, when no sovereign wealth fund wants our debt, rates will rise, a lot. Just like in Turkey, Venezuela and Argentina. America is insolvent and we simply offer more debt to paper over the obvious insolvency. I have a library of charts and it would be nice to put them up here, but we can’t because there is no app for charts.
“We had a debt bubble in 1929, and the Great Depression liquidated a lot of that debt in bankruptcies, insolvencies and companies simply going out of business. 40% of our banks failed.”
And the important takeaway from that mess; was that not nearly enough was liquidated. And even what little was; took way too long, and the process was way to cumbersome and costly.
Bankruptcy and Liquidation, are the only proper; as well as time tested; means of dealing with excessive debt. Not bailouts. Not debasement. Not “jubilees” nor whatever else cranks like suckering lightweights into falling for. Not extend-and-pretend. Not trivially illiterate drivel about how “liquidity” is somehow different from “solvency.”; which it is not.
Bankruptcy is NOT something “bad.” Heck, it’s not even any worse than the converse not-Bankruptcy. Both outcomes are equally necessary and important in any non-deterministic world: Uncertain projects are undertaken. Some turn out to create value, some don’t. Neither of those outcomes were any “better” than the other, a priori.
What is important; and what is the _only_ legitimate thing to focus on; is reducing the cost and time of bankruptcy and liquidation to the absolute minimum at all possible. The focus is on getting the valuable resources tied up in a value destroying project, pulled away and made available to other; non failed; projects as quickly and cheaply as possible. Wasting time and resources endlessly quarreling over who thinks he “has the rights” to what, should always play a distant millionth fiddle to simply getting the tied-up resources back into circulation. By all means: Allocate the remains as best can be done in a day in court; but at the end of the day the bickerfest is over. Then it’s cointoss time.The resources WILL be redistributed by end-of-day. Come what may, and no exceptions.
Failure to apply that level of urgency extended the “Depression” greatly. Not to do that again; is THE important lesson learned from it. In addition to the trivially obvious of no bailouts, no debasement/devaluation/confiscation/saving-the’syyystem’ nonsense,of course.
Just liquidate, and move on. By end of day.
The road to hyperinflation is paved with good intentions.
You’re underestimating the interest problem. Interest is over $1 trillion now going to $1.3 trillion by this time next year. Far more than Defense, Medicare or Medicaid. And this year we’ll be bonding over $10 trillion….over $8 trillion will be debt that must be rolled over at much higher interest rates. In 2020, the ten-year bond was yielding .6%….not much. Who bought them? Now the 10-year bond is yielding 4.2%, which is the market price but too low. America’s debt is junk! We simply borrow money to pay the interest on debt we’ve already borrowed. That means we’re pretty close to insolvency. When the debt bubble bursts, we’ll see a lot of inflation because people won’t want dollars, since we just print them. Trump said China was taking advantage of us but he was wrong. We’re giving them printed dollars (printed paper) for real products like car parts, cell phones, computers, etc.
Then China would be wise to take that junk money and buy hard assets all around the world in addition to gold.
I’m just hoping to leave this planet before the order is given to kill all the sparrows due to them spreading the Super Covid Plague.
No one cares what is likely to happen next year much less in 10 years.
FOMO
It’s true, most people don’t care because they’re idiots who live in denial.
I still work in healthcare amongst different settings. Shocking how little people care about finance or US/ world events.
Higher interest rates are what is needed to stop politicians from buying votes by promising & giving freebies with borrowed money at taxpayers expense. Government should not be in the business of giving money to people, this is what is the root cause of all corruption in the government. Government should just stick to making laws and enforcing them.
Just imagine – or look it up – anyone in 1928 writing “…in 10 years…this or that is going to happen…”?
Sadly, from a gross perspective, we paid $879.307 billion in interest on our national debt in FY 2023. That did exceed what we spent on defense in FY2023 which was $777.539 billion. Medicare and Medicaid are lumped together under the Department of Health and Human Services which had total spending of $1.711659 trillion in FY 2023. We spend more on Medicare than Medicaid, so we spent more on gross interest on our national debt than all but Social Security and Medicare. We’ve already paid $357.207 billion in gross interest on our national debt over the first four months of FY2024. The Federal Reserve projects that will will pay $1.002503 trillion in gross interest on our national debt for the entire fiscal year. That will put it as more than everything but SS which we’ll all but certainly see exceeded in the not too distant future.
See Figure 1,
link to kff.org
Federal Healthcare spending is already 1.9 trillion. Whether it’s Medicare or Medicaid or VA benefits doesn’t matter.
The only way out of this mess is massive inflation. The only alternative is debt deflation and the authorities will never let that happen. I wouldn’t be surprised if a cup of Starbucks coffee cost $100 by 2030. Got gold?
How will gold help? How did gold help over the last few years of massive inflation? The S&P 500 did far better than gold. Heck bitcoin (a fake useless currency) did better than gold.
Gold $400 per oz Feb 2004
$2000 per oz Feb 2024 5x increase
S&P 500 1900 Feb 2004
S&P 500 4800 Feb 2024 2.52x increase
Lol and the dividends from the S&P 500? I see you conveniently left those out and assumed no reinvestment. Gold doesn’t pay dividends.
But why don’t you run those numbers for the the period of inflation this past few years because that was the premise of the question and the use of gold right (for inflation)?
But why cherry pick 20 years, let’s do 100.
link to macrotrends.net
you can’t invest on a 100 year timeline. 20 years is about realistic for mere mortals. I don’t know how dividends effect the return. but many US stocks don’t pay divideds as I understand it?
At any rate, in my own currency the GBP, the increase in gold price is 7x compared to 3.5x over 20 years for the FTSE 100 (dividends excluded)
Given the debt bubble, the bubble in stocks, the bubble in crypto…..it’s hard to know where to put money to work. Lots of risk everywhere.
Central banks buy gold, not BTC. Thats all you need to know.
One virtue of inflation is it makes welfare and minimum wages worthless. Inflation is a powerful incentive for the welfare class to get a J.O.B. Oftimes they rather steal a car or plunder an Apple Store. That’s why there are no grocery stores or retail stores in the city. Don’t work there. Don’t go there.
Do you think Starbucks would stay in business if a cup of coffee costs $100? We’ve got inflation now and it’s much higher than official numbers. Costs of services have gone up 20% to 30% over the last 4 years. House insurance is up. So is car insurance. We have significant wage inflation.
I’ve facetiously suggested in the past that a $100/hr minimum wage would give everyone a livable wage. Sure there would be massive inflation but that never impacts government decisions. And then a week ago, I caught this story!
——-
California Senate candidates spar over Dem’s proposal for $50 minimum wage: ‘Do the math’
By Andrew Mark Miller
February 13, 2024
A Monday night debate in California between several candidates vying for an open Senate seat included a question about raising the minimum wage to $50, an idea that one Democrat candidate has floated.
“In the Bay Area, I believe it was the United Way that came out with a report that very recently $127,000 for a family of four is just barely enough to get by,” Democratic Congresswoman Barbara Lee said when asked to defend her previous support of a $50 minimum wage and explain how it would be “sustainable.”
“Another survey very recently: $104,000. For a family of one, barely enough to get by, low income because of the affordability crisis.”
Lee has previously called for a $50 minimum wage, which would amount to around $104,000 per year of income. The federal minimum wage is $7.25 per hour and ranges from $16-$20 in California.
…
link to foxnews.com
The government cannot get out of the debt mess via massive inflation. The numbers will just get bigger. Yes, the dollars they pay back are worth less, but for spending going forward they have to acquire goods and services at the new inflated prices just like everyone else. They get hit from both sides (expense and income) via the aforementioned price increases, COLA adjustments and income tax bracket inflation adjustments. Borrowing requirements will grow and grow. If not abandoned the end result is the total collapse of the currency.
Single payer care anyone?
It would surely be sprinkled with universal basic income. We are headed for disaster.
Interest on the national debt is over $1 trillion this year going to $1.3 trillion by this time next year. Debt loads will result in spending cuts, not increases. We have huge deficits and they’re getting worse.
This could be done, but not when you’re letting everyone in the country for decades and giving everything for free. Also, welfare would have to be structured differently. Don’t see anything good on the horizon just catastrophe.
And medicare isn’t factoring in the explosion of exotic diseases due to global trade, deforestation, climate and other factors. This article summarizes nicely how diseases have exponentially grown and spread due to modern technology and commerce.
link to nature.com
I doubt medicare is factoring technological advances that make people live longer and cause costs to be extended further either.
A prudent investor would be researching where medicare is spending their money and investing in those companies to profit off of all this cheddar. What the tax man takes from my left pocket, I take back with my right pocket and a little extra from your pockets.
Here are my long term picks to give you chums a taste: GILD, BMY, PFE, MDT. All aboard the money express…..Choo! Choo!
What does the Medicare spending line look like if outlays are offset by dedicated inflows. Showing just the cost part is misleading. Same for Social Security whenever that spending is displayed.
Medicare taxes only cover 15% of spending. 15%! Social Security taxes cover 85% of its outlays. Medicaid has no corresponding tax and is pure deficit. Clearly medical spending is a far bigger issue than defense or social security
Still misleading to not show dedicated inflows. Medicaid is a diffetent issue which I did not comment on.
BTW, medicare taxes and premiums paid account for 49% of Medicare outlays.
Yeah, I know they like to play budget games with the OASI trust fund to pretend that the deficit applied somewhere else. Actual tax receipts from the medicare payroll tax only covers around 15% of the medicare outlays.
One day the “Defense” misnomer will be history.
They should go back to the old name….WAR DEPARTMENT
So funny to hear Nikki Haley say we are spending more on interest than defense. As a major war hawk, her fix for this is t spend more on defense!!
She’s a nut and just another example why we need another political party.