A billion here, a billion there, and pretty soon you’re talking real money.—Senator Everett Dirksen.

When Senator Dirksen offered that wry quip in the 1960s a billion dollars was big money. Today, with federal deficit spending hitting a trillion per year, a billion dollars seems as quaint and anachronistic as the good senator’s old dial telephone.

We have been lulled into the fantasy that government deficit spending has no consequences. If Senator Dirksen was warning about it almost 50 years ago and we as a nation are still here and prospering, maybe it doesn’t matter, right? Thus do we whistle past the graveyard.

We know that rising interest rates make it more expensive to get a mortgage or car loan, but we never think about how it could affect the health of the government, which is to say us as taxpayers as the government racks up more debt.

How rising rates ripple through the economy

Rising interest rates make the cost of borrowing higher for consumers: mortgages, car loans and credit card interest rates ratchet upward. Consumer spending, which accounts for 70% of economic activity slows as consumers must cut back. But the government never cuts back. It always spends more and more.

While our eyes are fixed on these more immediate impacts in the private sector, we pay no heed to the long term impact to be felt on us as citizens and taxpayers when rates rise.

The government debt tsunami

Currently the cumulative debt of the federal government stands at $21.6 trillion. This covers all federal government debt held publically by investors, institutions and foreign governments as well as intragovernmental debt, which is federal government debt held by itself in agencies such as the Social Security Administration.

With interest rates on the rise, the annual portion that the federal government will have to pay out in interest on government bonds will grow as a percentage of the budget, making it harder for the government to pay for defense, entitlement programs, the administration of innumerable government agencies and everything else.

Investor’s Business Daily, citing the Wall Street Journal, explains how rising interest rates will consume more of the federal budget:

A recent Wall Street Journal report gave the gory details: Just last year, paying the interest on our $20 trillion in debt took just $263 billion, equal to 6.6% of all federal spending or about 1.4% of GDP. That’s low, largely because half of our debt was issued while the Fed held interest rates at zero percent. That’s no longer the case, however.

With the Fed now in a tightening cycle, every 1% gain in interest rates adds $200 billion to our annual interest on the debt. With a budget deficit of $779 billion this year, and more like it expected, not only will the debt be growing but the interest payments on it will grow, too.

The reflexive liberal economic response is that we need higher taxes to bridge the gap, totally ignoring the bald fact that the problem is one of over spending, not under collecting of taxes. Tax cuts wrongly get the blame which Congress should bear.

Federal revenues for fiscal 2018 showed an increase of $19 billion over the year before. Tax cuts and deregulation fueled economic growth, increasing the size of the economic pie. The government took a smaller percentage slice of the pie, but the pie grew in size, actually producing more revenue.

Meanwhile Congress increased spending by $243 billion. It does no good to increase revenue if spending grows even faster.

Now with interest rates on the rise, and Congress spending completely out of control, interest rates will take a bigger bite of the budget each year. If the federal government continues to spend and borrow at the same pace it will suck more and more air from the economy slowing economic growth for an extended period, perhaps like Japan’s “Lost Decade” in the 1990s. The bursting of speculative bubbles, government debt and an aging population formed the perfect storm for Japan. Add the wave of Baby Boom generation heading into retirement in the U.S. and it seems reasonable to ask: Could the same happen here?

Contact our office for a complimentary portfolio review.

Listen to the latest edition of Jerry Tuma’s Smart Money Radio.

Stay in touch regarding our next Smart Money Investor Training workshop.