If you ever take a finance/investment class, one of things they drill into you is the magic of compound interest. This is the idea that money grows geometrically since you not only earn interest on the intial amount but also on the interest itself. For example, if you have $1000 to start and earn 10%, you end the year with $1100. In year 2, however, you earn 10% on the original $1000 plus 10% on the $100 you made last year. Thus, you make $110 total to compound to $1210. In year 3, you earn $121 in interest, and so on. At the end of 30 years, you’d have $17,449. That’s $16,449 you’ve earned compounded onto your original $1000.
If you add in an additional $1000 savings at the end of each year, your ending amount grows to $181,943! That’s the magic of compound interest. Of course, the annual interest rate makes a big difference. If you only earn 5 percent, instead of $17,449 and $181,943, you’d only have $4,322 and $70,761, respectively, but the same principle holds–the numbers can grow staggeringly large over time. Expanding this example, $1000 initially + $1000 per year at 10% would grow to $1.28 million in 50 years and $14 million over 75 years. Keep in mind, this is only from adding $1000 per year. See the magic?
What is not emphasized enough is that this compounding works the same for debt. If you never pay off the principle, you not only have to pay interest on the original debt but also interest on the additional interest. This snowballs even more when your taking on additional debt outside of the interest due. See any connection to our government? America already is spending over 13% of all expenses on interest alone–more than Medicare and almost as much as defense. Interest costs will easily surpass everything else in a few years. As mentioned in the examples above, interest rate makes a big difference. Consider that Trump refinanced much of the debt when government securities were paying less than 1%. Once those expire, they’ll have to be refinanced at much higher current rates. Check out this graph showing how annual interest paid has grown in recent years to the $659 billion it is now. Notice the slight dip with Trump’s refinancing followed by the monsterous slope upwards through the Biden administration.
Unsustainable is not a sufficient enough term to describe the path we’re on.
Pick wherever you think the government should redirect spending–education, the border, social security, national defense, health care, tax cuts, etc.–all will have less money available. At a certain point, the only solution feasible is to devalue the currency even more, meaning hyperinflation. It’s not like this is a new thing. We’ve had plenty of examples from history such as Germany’s Weimar Republic, or more current examples like Turkey and Venezuela. I cannot emphasize this enough–government spending is the #1 THREAT to the future of the United States! Nothing else is even close. The Biden Administration hasn’t tried in the least to rein in spending. If the Republican Party can’t stop this trainwreck, there really is no point to their continued existence.
