Rising inflation lowered wages for needy families by 3% last year, and the Federal Reserve and market forces are likely to defeat this inflation, while the impact of higher interest rates will remain on both Washington and taxpayers for years to come.
In a report published by the American magazine "National Review," writer Brian Riddell said that families who intend to buy a new home are already feeling the interest rate crisis;
The average mortgage rate on a conventional fixed-rate loan jumped from 2.6% to 5.8%, bringing the monthly value of a median home from $1,289 to $1,877, coinciding with higher interest rates on auto loans and small business loans.
The writer suggested that prices will continue to rise, after the Federal Reserve raised the federal funds rate from 0.25% to 1.75%, and once inflation is defeated, the Fed will not cut interest rates again in the range of 0-2.5% that has prevailed over the past 14 years. .
According to the author, investors are likely to demand many years of higher interest rates in order to avoid losses again. Families are more willing to borrow against future wealth), and global investors seek stronger returns faster, while the massive increase in national debt projected by the Congressional Budget Office will add nearly 3 percentage points to interest rates over three decades.
Difficulty tolerating high interest rates
The magazine reported that Washington, which tops the list in debt, cannot afford higher interest rates;
Over the past few years, lawmakers and economists have called on Congress to take advantage of low interest rates by engaging in massive borrowing, and President Joe Biden's massive spending agenda has often been justified by low interest rates on government borrowing.
This case cannot make sense for two reasons.
The first is Washington's expectation to add $100 trillion in primary deficits over the next three decades due to a lack of Social Security and Medicare.
The Congressional Budget Office also predicted that, even with low interest rates, interest costs would rise, becoming the most expensive item in the federal budget and consuming half of all tax revenue within a few decades.
The writer added that while the second reason is Washington's lack of control over low interest rates;
The average maturity of the federal debt has fallen to 62 months, which is the rate at which the entire rising national debt will move if interest rates rise at any time in the future, and therefore continued federal borrowing based on the hope that prices will not rise and without any backup plan is considered A risk to the future of the American economy.
Conservatively, the author says, the recent baseline of the Congressional Budget Office assumes that the average interest rate on federal debt will rise to 3.1%, exceeding its forecast for last year by 0.7%, and modest forecasts show that the cost of $1.2 trillion in federal interest payments The annual budget will exceed the defense budget, and represent a record 3.3% of the economy, which is the likely scenario of a strong economic recovery, low inflation, and no new spending expansions.
Continuing rise
But what if interest rates exceed the 3.1% expected rate in the Congressional Budget Office?
Each additional percentage point will cost the federal government $2.6 trillion by 2032.
If interest rates rise 2 percentage points above the baseline, it will lead to an annual budget deficit of $3 trillion within a decade of peace and prosperity devoid of new federal initiatives.
According to the author, the long-term cost is more serious;
Interest rates that exceed the Congressional Budget Office projections by 1 percentage point will add $30 trillion in additional interest costs, which is equivalent to funding an additional Department of Defense, and within 3 decades the interest will consume 70% of annual taxes, pushing the budget deficit to 18% of the economy, pushing the national debt to roughly 250% of the economy, and additional rate increases could lead to much worse outcomes.
The writer stresses that Congress and the White House are not ready for a world of high interest rates, in which lawmakers must stop passing new expensive legislation, and gradual austerity must be imposed that enables the preservation of economic growth and the tax base.