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132 US Deficits and the Rising Debt

The US is currently incurring deficits which then become debts. It is the purpose of this posting to describe the conditions under which debt accumulates and how rising interest costs will then give rise to further budget shortfalls.

The federal budget deficit was $895 billion for the first 11 months of fiscal year 2018. The Congressional Budget Office estimates that this deficit was $222 billion greater than the shortfall recorded during the same period last year. 

Much of the negative contribution in the trade of goods and services comes from China, which has displaced a large share of the US manufacturing capacity. Chinese low labor costs and effective investments in modern manufacturing technologies made their exports to the US attractive while their imports from the US were lagging.

The US budgetary deficit has declined sharply since 1992. One of the causes was a steadily increasing negative balance of trade, currently running at about $50 billion per year:

Trade deficits plus large budgetary deficits from government operations resulted in a rise in the total federal debt because excesses in spending were never balanced with rising incomes.

The US fiscal policy since the 1970's favored the passing of all deficits to increasing national debt instead of favoring the management of US finances that prevailed during the prior decades as a balance between expenses and incomes. 

It can be seen that the increases in US debt since 1970 have been correlated  primarily with fiscal deficits from the budget of government operations:

The above chart shows that the current federal budget deficit that averages over trillion dollars/year coincides with corresponding federal debt increases.

One of the consequences of the rise in debt has been an increase in interest payments:

Interest rates paid on debt are now 2.25 percent. Looking forward the federal funds interest rate is projected to to over 3.00 percent by 2020.(1) That suggests interest payments in excess of a trillion dollars per year in the federal budget, thus squeezing out many discretionary expenses that benefit the population.


A rising debt the results from deficit in trade as well from government operations will result in an increase in the costs of interest that the government pays to holders of treasury bonds. 

   The future impacts of such payments, as the credit-worthiness of US declines, will become a critical issue in fiscal management. The future costs of US debt will become a major influence on the fiscal prosperity.  



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