U.S. is headed for a debt spiral at this rate. Iran war makes things worse.
This country will be over $40 trillion in debt by the end of the year, equivalent to $112,000 per person. Recently released Congressional Budget Office numbers suggest that the event horizon of some form of debt-induced fiscal crisis is drawing closer. That was before we started a war of choice with Iran.
War is costly — in ways that you may not expect.
The first cost, of course, comes in the form of the flag-draped coffins. I deeply respect the sacrifice of our service members, and in their honor and for the sake of all of us, I pray that this conflict will lead to a positive outcome for our country and the world.
But as someone who has spent a good deal of time working on budget and fiscal issues, I am terribly concerned about where this is headed. We are not in a good fiscal position to sustain an increase in defense spending nor take on the economic crisis that this conflict is likely to precipitate.
Hyperinflation is a real risk Americans face
When we went into the wars of the Middle East after the terrorist attacks of Sept. 11, 2001, we were starting with a balanced budget (zero deficit) and a hard won debt-to-gross domestic product ratio below 60%. We had some fiscal capacity to take on a geopolitical crisis without risking a debt-induced fiscal crisis.
This is not the case today. Our federal government is running a 30% operating shortfall each year ($2 trillion deficits) and our national debt is at over 122% of GDP — a level that rivals our peak debt burden at the height of World War II, with no end in sight and no plan to contain its growth.
Given our current fiscal trajectory, with no major shocks such as a war or economic chaos from on-again, off-again tariffs, analysts project that carrying this debt burden will force up interest rates for a long time to come.
Meanwhile, our population growth will stall and the combined effect will be economic stagnation for years to come.
But there are also substantial risks of much worse outcomes. Buried in recently published CBO documents is a projection that, given our current fiscal trajectory, by 2031 we might hit a “debt spiral” — where we are issuing debt to simply cover interest payments. This, in turn, drives up interest rates and increases the interest payments further, which means we have to issue even more debt, and so forth.
In essence, the debt takes on a life of its own and grows unconstrained. An individual would face bankruptcy at this point — but an indebted nation will be forced to print money (or take some sort of equivalent action) to cover its debts. This, of course, causes significant inflation or hyperinflation, rising interest rates or some toxic combination of both.
War debt is a fiscal and national security threat
We have no business taking on more debt and more risk — but that is what this war does, directly and indirectly.
The war, of course, has direct costs. Kent Smetters at the Penn Wharton budget model estimates that this war will cost us $40 billion to $95 billion in direct costs for the next two months.
The president has indicated that he will request $50 billion in increased defense appropriations and, so far, the chairman of the House Appropriations Committee has indicated he won’t bother to try to offset the cost. Obviously, if prolonged — or if we have to place boots on the ground — the cost could increase substantially.
But even more worrisome are the economic consequences that, in turn, will inevitably feed into our budget and fiscal position.
The risks are widely known and understood. For decades, analysts have run simulations for the U.S. military of the economic implications of an attack on Iran and the closure of the Strait of Hormuz, a narrow channel out of the Persian Gulf that is controlled on one side by Iran. Twenty percent of the world’s supply of crude oil and 20% of natural gas flow through this channel, which Iran can block through low-tech, low-cost means: mining, obstruction (sinking a ship), drone attacks, etc.
Even bottling up a fraction of this amount of oil and gas has significant economic implications for us and for the global economy. For an excellent description of the economic modeling, I recommend listening to an interview of Bill Beach at the conservative Fiscal Lab on Capitol Hill.
The key takeaway from this conversation is that an extended oil shock is highly likely to lead to a serious recession — but also inflation as the increased price of oil ripples through the economy (yes, our “energy independence” notwithstanding, as we see at the oil pump even today).
We are then in a bind — our revenues will fall and demand for safety net programs will rise. Meanwhile, the way out of recession is to spend more money. This drives up the deficit further, increases inflation further and brings the date of a deficit-induced fiscal crisis even closer — if not actually triggering the crisis.
This is why U.S. generals and military advisers see our national debt and deficit as a serious national security threat. This is how great and powerful nations often fall: not from the war itself but from the fiscal crisis it precipitates.
Nothing is certain, of course. We might get lucky and the war wraps up tomorrow. But what is certain is that we are dicing with disaster.
Carolyn Bourdeaux is a former Democratic member of Congress from Georgia’s 7th District. She is a contributor to the AJC.
