I’m not predicting a crisis. I’m not forecasting anything. I’m doing subtraction — and the answer is roughly another trillion dollars a year, out the door, for nothing.

Three numbers, one piece of arithmetic

One. The United States government owes just about $40 trillion.

Two. The average interest rate we pay on that pile is 3.41%, per the Joint Economic Committee’s monthly debt update, off Treasury data.

Three. If the Treasury borrowed that money today, it would pay about 4.5% at five years and more than 5.25% at thirty.

Now the arithmetic: what happens when money we borrowed cheap has to be borrowed again — expensive?

That’s it. That’s the entire show.

It’s a balloon note, not a mortgage

Think about your own house. You refinanced in 2021 at 3% and you feel pretty good about it. Now suppose it isn’t a thirty-year loan — suppose it comes due in five years, and you refinance at whatever the bank charges that day.

That’s not a mortgage. That’s a balloon note. And a balloon note is exactly what the Treasury has written on your behalf.

Federal debt is not one long, fixed loan. It’s bills, notes, and bonds — four weeks out to thirty years — and every one of them, when it matures, gets paid back by borrowing the money again. Average maturity is about 70 months. And roughly one-third of the publicly held debt comes due within twelve months.

Our average rate is only 3.41% because so much of this debt was issued in 2020 and 2021, when Washington could borrow at 1.5%. We are eating the leftovers of the cheapest money in American history.

Look at that gap and you have the whole story. As the old cheap debt matures, it gets replaced with expensive debt — automatically, mechanically, whether Congress acts or not.

And it’s happening now. On August 13 the Treasury sold $25 billion of thirty-year bonds at 5.216% — the highest auction yield since 2001 — on weaker demand than the month before. The day prior, the ten-year auction drew its highest financing cost since 2007.

What it already costs

For a decade Washington got a free lunch. In 2010 the government paid $414 billion in gross interest. By 2020 the debt had roughly doubled — and gross interest was $523 billion. We doubled the national debt and the interest bill rose about a quarter. Washington learned a lesson in those years, and it was the wrong one: that debt is cheap.

That lunch is over. Now the pile is growing and the price is rising at the same time.

Interest now costs more than the entire national defense budget. More than Medicare. By 2048, CBO projects it becomes the single largest thing the federal government does. We’d be spending more to service the past than to build the future.

Make it personal: the debt grows about $2.8 trillion a year — roughly $89,000 a second. That’s about $115,000 for every American, $292,000 per household. A second mortgage on a house you never bought and cannot sell.

In June the Government Accountability Office reported that debt held by the public now exceeds the size of the entire American economy — first time since the Second World War — and expects it to grow about twice as fast as the economy for the next decade. Not during a crisis. During normal times.

The trap: more debt causes higher rates

The Fed sets exactly one rate — the overnight rate. Everything longer is set by buyers and sellers deciding whether America is a good credit. There’s an old name for what those buyers are doing: bond vigilantes.And it reaches you directly, because those long yields set your mortgage.

Now watch the trap close. More debt means more bonds. More bonds chasing the same buyers means a lower price — and a lower bond price is a higher interest rate, same thing said two ways. So more debt raises rates. Higher rates raise interest costs. Higher costs mean bigger deficits. Bigger deficits mean more debt. That’s a loop, and it tightens on itself.

There’s a quieter cost that may be the largest of all. Every dollar that buys a Treasury bond is a dollar that didn’t build a business. The Penn Wharton Budget Model projects our capital stock could be 15% to 19% smaller by 2060 and wages 5% to 6% lower. The debt doesn’t just take money from your grandchildren. It takes the raise they never get.

And there’s a second door out that’s worse. If the market won’t buy the bonds at a price the government likes, the central bank can buy them — with money it creates. For a government that owes $40 trillion in fixed dollars, inflation isn’t a bug. It quietly shrinks the real value of what it owes. It’s a tax nobody has to vote for and nobody can see on a receipt.

Inflation is a default that doesn’t have to be announced. And it is paid overwhelmingly by wage earners, savers, and retirees on fixed incomes — the people with the least ability to move.

The rest of the world is already voting

In June the European Central Bank published a report with a line in itthat should have led every newscast in America. It didn’t lead any of them.

Let me be precise, because the honest version is strong enough. The ECB attributes the crossover mainly to price — gold had an enormous run. Nobody is dumping our bonds. The accurate way to say it: the world is not selling our Treasuries. It is declining to buy more of them.

But part of it is deliberate, and that part matters. Central banks have bought roughly a thousand tonnes of gold a year for four straight years. In the second quarter they bought a record 289 tonnes while the price fell 16%. Poland first, China second. People who buy an asset while its price is falling aren’t chasing a chart — they’re moving out of something.

Understand what triggered it. In 2022 the West froze Russia’s dollar reserves. Whatever you think of that decision — and there was a real case for it — every treasury minister on earth drew the same conclusion. Dollar reserves can be switched off. Gold in your own vault cannot.

That’s the Red Horse at work. China, Russia, and their partners aren’t trying to beat the dollar in a fair fight. They’re trying to make it optional.And it isn’t only adversaries: Japanese investors hold roughly $1 trillion of our debt, and with their own yields rising, that money has started coming home. Our friends aren’t attacking us. They’re doing math.

We have seen the end of this road before. In November 1978, with the dollar collapsing, the Treasury issued bonds denominated in West German marks and Swiss francs, and we more than doubled our monthly gold auctions to break the price. Sell the gold, borrow in their currency. The difference between then and now: in 1978 the world’s central banks were buying our bonds. Today they’re buying the thing we sold.

The fork in the road

You’ll hear it said that interest is about to swallow every dollar of federal revenue. On the official baseline, that does not happen — it stalls around a quarter of revenue. I’ll be straight with you about that, because I won’t sell you a number I can’t defend.

But here’s my contention, flagged as my judgment rather than anyone’s projection: the official numbers understate this — they don’t overstate it. CBO’s baseline assumes real rates flatten after year ten even as debt climbs, that health-cost growth falls to zero, and that there’s no recession, no war, no crash. Every one of those has to hold for thirty straight years. Not one of them ever has. Errors in a forecast like this don’t scatter evenly. They pile up on one side.

On the official assumptions, it never happens. Let the average rate reach 6.5% — barely a point above today’s thirty-year bond — and it crosses in the early 2050s. Now put in the rate environment my generation actually lived through: 8%. At 8%, federal interest passes every dollar of federal tax revenue in about seventeen years.

I’m not telling you that will happen. I’m telling you it doesn’t require a catastrophe. It requires interest rates this country has already had once, inside living memory. The date isn’t on a calendar. The date is a mood.

Four ways out — and only one works

Default. Inflate. Tax. Or grow.

Default destroys us — every pension, every insurer, every bank holds these bonds. Inflating is a slow default that robs the poor first. That leaves taxing and growing. Here’s why the tax answer fails.

A rising movement in this country says the problem is billionaires. I want to answer that seriously, not with a slogan. Senator Warren’s Ultra-Millionaire Tax would levy 2% a year on net worth above $50 million, an extra 1% on billionaires, and a 40% exit tax if you try to leave.

So run the arithmetic all the way to the end. Forbes counts roughly 989 American billionaires worth about $8.4 trillion combined. Take all of it — not 2%, but 100%. Every share, every building, every private company. You’ve raised $8.4 trillion against a $40 trillion debt, retiring about 20% of it. And the debt grows $2.8 trillion a year. You’ve bought the federal government three years — and then the money is gone, and so are the people who made it.

That’s the generous version. That $8.4 trillion isn’t in a vault; it’s stock — ownership of the companies your 401(k) holds. You can’t sell all of it without collapsing the price of all of it. Force that sale and you’re taxing a number that evaporates the moment you reach for it, while the wreckage lands in the retirement account of a schoolteacher who never met a billionaire.

Then watch the threshold move. The income tax was sold in 1913 as a tax on the very rich. Warren’s bill already starts at $50 million, not $1 billion. It always starts with people you’ll never meet, and it never stops there.

But the anger points at something real

I don’t want to just say no. The people drawn to this are responding to something true. The wealth gap is real, and it hurts. Conservatives lose this argument because we refuse to explain what actually caused it.

Three hundred years ago an Irish-French banker named Richard Cantillon noticed that new money doesn’t land on everyone at the same moment. It enters at one point — the banks, the bond market, the government, the people who already own assets — and spreads outward. They get it first, at yesterday’s prices. The wage earner gets it last, at tomorrow’s prices.

Look at what we just lived through. Washington created trillions. Asset prices went vertical. If you owned assets you got richer; if you earned wages you got a higher grocery bill. That isn’t free-market capitalism. That’s what happens when the measuring stick is rigged. And Scripture is not neutral about a rigged measuring stick: a false balance is an abomination to the Lord, but a just weight is His delight. A dollar is a weight. It measures work. When you print money, you shave the weight.

So the free-market answer to the wealth gap isn’t to seize what the rich own. It’s to stop debasing what the rest of us earn. Sound money is the anti-poverty program conservatives forgot they had.

The one that works: grow

Here’s the genuinely good news. The debt problem is a ratio, not a number — debt divided by the size of the economy. You don’t have to shrink the top of that fraction. You have to grow the bottom faster. After World War Two we carried debt larger than our whole economy and grew out of it. Not by confiscation. By production.

That’s the National Battle Plan: cut the regulatory drag, because regulation is a tax that never shows up in the budget. Keep taxes low and permanent, because capital won’t build a factory on a rumor. Unleash American energy, because cheap energy is upstream of everything. Cap spending growth below the growth rate of the economy — and mean it. Deal honestly with Social Security and Medicare. And restore sound money, which is the one nobody talks about.

Your Personal Battle Plan — four things, this week

1. Find your own average interest rate — and what you’d pay refinancing today. Do for yourself what the Treasury can’t avoid.
2. Get out of variable-rate debt. You are the small version of this whole story.
3. Own something that cannot be printed — real money, in a form you can actually use.
4. Ask your advisor one question: “What happens to my portfolio if long-term rates go up two more points?” If they can’t answer, you have the wrong advisor.

And ask your representatives one question too: do you support capping spending growth below GDP growth — yes or no?

This is the Four Horsemen riding together. The Red Horse — Communist China — is buying the gold and building the exits. But the Yellow Horse is the one that hurts: the traitors, the cowards, and the fools. Not one of these numbers required a foreign enemy. We voted for every dollar of it. One of those horses you cannot vote out. The other one you can.

The debt is not just a number. It is a claim on your future labor. Nobody is coming to fix it for you. But it is fixable — by growth, by honest money, and by people who refuse to be numb to the truth.

Remember: what we see as a marketplace, our enemies view as a Battle Space.

God bless you, and God bless these United States.

Kevin D. Freeman, CFA, D.Sc. (h.c.)
Host, Economic War Room

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Disclosures. The Economic War Room does not provide personalized investment advice, and nothing here is a recommendation to buy or sell any specific investment. I serve as an advisor with the NSIC Institute and have a financial interest in work described on this program — you should always know who’s talking and why. Figures come from public sources and are dated where it matters; the crossover model is our own, run under stated assumptions rather than published as anyone’s forecast. Check every number. I want you to.

 

 

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