The CBO projects interest rates will increase as it expects the Fed funds rate will increase to 4% by 2021. The table below shows the costs of various government expenditures. The net interest payments will exceed the spending on defense in 2023 and it will exceed all non-defense spending by 2025. There will be a debt spiral if interest rates continue to go up which increases the (technical) default risk of America. That possibility is far out for now, but the US doesn’t want to be in a situation where its budget only makes sense with near-record low interest rates.
One of the reasons foreign governments buy U.S. treasuries is that the US dollar is the foreign reserve currency. If the dollar loses this status because of the high deficits, it will hurt demand, bringing up treasury yields which will squeeze the budget, devastating the economy.
The Benefit Of The Tax Cut To Families
So far, there hasn’t been a major boost in retail sales like we’ve seen in corporate earnings estimates after the analysts began including the effects of the tax law in their numbers. The explanation of this lack of an increase is seen in the chart below.
50% of families will see a $20 or less tax cut in a 2 week period. Only 25% of families are getting a $50 or greater benefit in a 2 week period. The effects of the tax cut should increase over time as the money saved begins to build up for families. This is different from corporate earnings estimates which are modeled out right away. Stocks probably priced in the tax cut before the analysts updated their numbers.
The CBO came out with its projections for the next 10 years which include the effects of the tax cut and the spending plan. The latest plans are extremely negative for the government’s budget. This will eventually lead the debt held by the public to be greater than the entire economy, which by certain measurements is already the case. It’s unlikely that the government will ever become fiscally retrained, but there might be some motivation to cut spending when the interest payments further eat into the budget because of higher interest rates.