Speaker Johnson’s First and Last Hurrah
November 20, 2023
It’s a good thing the House GOP elected a “real” Republican leader the other day. In his debut action the new GOP Speaker kept the government open, by golly, and did so with a huge majority of, well, Democrats!
That’s right. Among the 336 votes for Johnson’s “no cuts” continuing resolution 209 or 62% were Democrats. By contrast, among the 95 nay votes, 98% were cast by Republicans. We’d guess the two Dems who voted “nay” may possibly be color blind.
Voting Station on US House Floor
In any event, the public debt weighed in at $16.4 trillion in 2013, and it had taken 226 years to get there. Now, in single decade that figure has doubled to $33.2 trillion and we are just getting started. Given the built-in policy deficits and another overdue recession in the next year or two, we will be at the $50 trillion mark well before the end of the current decade.
To put it more dramatically, we recall well the angst that overcame the Reagan White House in early 1981 when it became necessary to raise the debt ceiling above $1 trillion to finance the red ink inherited from Jimmy Carter. Whatever was the financial equivalent of turning into a pillar of salt, believers in the old-time GOP religion of balanced budgets feared it was about to happen.
No more. The public debt has gone from $1 trillion to what will be $50 trillion in barely five decades. And yet today’s GOP cannot even seem to elect a Speaker who will take a stand for even the mildest gesture of fiscal restraint.
To be sure, both Jimmy Carter and Ronald Reagan promised to balance the Federal budget by the end of their first terms, respectively. Both ended-up being inundated in red ink, but as a matter of the historical record they both did at least give lip service to fiscal responsibility.
Now the parties of both Carter and Reagan have been supplanted by the careerist-dominated Uniparty domiciled on the banks of the Potomac. The latter no longer even try to contain the debt, let alone balance the budget. In fact, by our count we have had four successive Republican Speakers in the last decade who have opted over and again to keep the lights on at the Pentagon, HSS, the Education Department and the Washington Monument, too, whenever push-has-come to shove on the legislative calendar.
And yet, and yet. We just had another inflation report for October that said the 16% trimmed mean CPI posted at +4.11% on a Y/Y basis, even as they were buying 10-year USTs today hand-over-fist in the bond pits at a yield of 4.45%. In other words, fiscal Armageddon is visibly barreling down the tracks, yet these cats are buying Uncle Sam’s IOU’s due a decade from now at a real yield of just 34 basis points!
And that’s not the half of it. The blue bars (10-year UST yield) sticking ever so slightly above the running inflation rate (red bars) during September and October 2023 in the chart below represent the first time in the last five years that the real yield on the benchmark bond of the world’s most voracious borrower was actually above zero.
Needless to say, there is no way this is remotely sustainable unless the Fed cranks up the printing presses right soon, but, alas, that’s not possible, either. As long as the running inflation rate remains in the 4%+/- zone, even the Keynesian politburo at the Eccles Building is not about to start buying any bonds; and it may well remain reluctant to even stop dumping its existing portfolio at the current $95 billion per month QT rate.
So, yes, Speaker Johnson has now shown that he has what it takes to become still another Boehner/Ryan/McCarthy capitulator, but perhaps he should not get too comfortable with the accolades from the editors of the New York Times and Washington Post for doing the “responsible” thing. At it happens, the fiscal clock is about to run out of dithering time.
CPI Inflation Rate Versus 10-Year UST
Besides the fact that the Fed’s printing presses are now on an extended “idle” mode, there is another nasty turn of events barreling down the road. To wit, a massive amount of ultra cheap Federal debt is now maturing, and will need to be replaced by bills, notes and bonds with far higher yields. And that’s just to run in place at the existing $33.2 trillion debt mark—to say nothing of the $2 trillion to $3 trillion per year of new red ink that is baked into the fiscal cake.
As shown in the chart below, currently $8.2 trillion of Federal debt will need to be refinanced in the next 12 months, and that number will just keep getting bigger thereafter. Moreover, the sheer math of this massive impending roll-over is literally staggering.
To wit, as recently as 19-months ago the weighted average yield on the total public debt was 1.80%. But the weighted average current market yield clocked in today at 4.80%, even in bond pits where the traders and robo-machines are operating with their heads in the sand owing to the false belief that the Fed will crank-up a massive QE bond-buying spree any day now.
So what this means is that a single round of refi on the currently outstanding $33.2 trillion public debt will add a staggering $1.0 trillion to annual interest expense.
For avoidance of doubt, here is the current soaring trajectory of annual interest expense on the public debt. It has already doubled from $500 billion to nearly $1 trillion per year during the last 36 months alone. And now as the tsunami of refi debt plus new UST issuance floods into the bond pits, the line in the chart below is likely to go even more parabolic than it already has.
It is also possible that the blind mice in the bond pits will wake up to the insuperable math of the nation’s runaway debt and to the fact the GOP has put up still another Speaker who doesn’t have the gumption to let the lights go off all around the Imperial City. So when the bond vigilantes at last come to life, it will be Katie-bar-the-door time in the Imperial City.
The fact is, the public debt will be close to $40 trillion before the next President makes his first weekend trip to Camp David. Add 200 basis points to today’s average market yields and account for the massive rollover of existing public debt—most of which was foolishly financed at the front-end of the curve during the Uniparty stimmy bacchanalia under the Donald and Sleepy Joe, successively—and you will have a $2.5 trillion annual interest expense tab.
A long time ago, the old-time fiscal stalwarts used to repeat a little ditty that said, “when your outgo exceeds your income your upkeep will eventually become your downfall”.
They surely got that right.
Annualized Rate Of Interest Expenditures on the Public Debt, 2000 to 2023
Someday historians of America’s fiscal demise will wonder how the above red line went utterly vertical, bringing the nation’s fiscal house down as it did. But actually, there should be no mystery.
Self-evidently, the Fed made it all possible. Even as the public debt (purple line) was climbing from 55% of GDP at the turn of the century to 120% by the end of Donald Trump’s egregious spend-a-thons in 2020, the interest cost (yellow line) was falling by one third, from 3.5% of GDP to just 2.5%.
Needless to say, that wasn’t on the level. Not remotely so.
When the Fed was finally forced to stop its massive bond-buying spree, therefore, the law of supply and demand came back to life in the bond pits. And that’s all she wrote as yields soared skyward.
Public Debt As % Of GDP Versus Interest Expense As % of GDP, 2000 to 2020
Future historians of this impending fiscal crack-up will likely note one additional culprit that made it all possible. Namely, that the GOP got taken over by neocon warmongers and beltway lifers who were more interested in keeping the lights on and feeding the interest groups and the PACs that elected them than in keeping the nation solvent.
Accordingly, during the years of Uniparty rule, especially since 2016, there was either a Republican in the White House or GOP control of one or both houses of Congress. That is to say, when it comes to annual appropriations, the GOP had blocking power through the presidential veto or in one of the legislative chambers.
So what happened?
In the case of the national security budget including defense, international operations and veterans, spending rose by $380 billion or 52% between FY 2016 and FY 2023—the latter being the level which Speaker Johnson’s CR would keep in place. But that was exceeded by an even larger 64% gain in domestic appropriations.
National Security Appropriations:
- FY 2016: $733 billion.
- FY 2023: $1,112 billion.
- Increase: +$379 billion.
- % Increase: +52%.
Domestic Appropriations:
- FY 2016: $434 billion.
- FY 2023: $711 billion.
- Increase: +$279 billion.
- % Increase: +64%.
There you have it. To secure the means to fund Washington’s empire abroad, the GOP gave away the store on domestic appropriations, too.
It’s no wonder, therefore, that Speaker Johnson has already thrown in the towel. He became domesticated to the rule of the Uniparty even before he found the washroom in the Speaker’s office.
Reprinted with permission from David Stockman’s Contra Corner.
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