'Guns or Butter' Has Become 'Guns and Butter'

• Macroeconomics teaches that tax revenues can be spent on "Guns or Butter" (military or nonmilitary goods) and apportioned between the two.
• The US is running a $2 trillion deficit, resulting in a debt of over $33 trillion, which is 130% of GDP. Instead of apportioning taxes (budgeting), we’re increasing debt so we can have both Guns AND Butter.
• Interest on the debt is currently 2% but heading towards 5%, which will crowd out other expenditures and escalate deficit spending.

Macroeconomics teaches that our tax revenues can be spent on “Guns or Butter.” Every dollar we budget for “Guns” is a dollar that can’t be spent on “Butter." “Butter" represents nonmilitary goods that increase social welfare, such as schools, hospitals, parks, and roads. "Guns" refer to military goods such as personnel—both troops and civilian support staff—as well as military equipment like weapons, ships, or tanks.

But with conflicts in Ukraine and Israel we are being told that $150 billion in military aid and other support is no problem for the mighty US – that we need not worry where this money is coming from, certainly not from Butter. It’s coming from increased deficit spending, so the sacrifice is not our Butter -- it’s our kids’ kids’ kids’ Butter – they will pay.

The US is currently running a $2 trillion deficit, spending $6 trillion when tax revenues are only $4 trillion. As a result, our debt has swelled to more than $33 trillion, which is 130% of GDP, with every indication that there is nothing to slow its growth. We want “Guns AND Butter,” and we can get them both as long as the borrowing window stays open. This window is requiring higher interest payments; new Treasury issues are clearing at increasing levels of interest. 

Limits

Of course, there are limits to how much the US can owe, and we are testing those limits. When these limits have been breached in the past by other countries, the government typically “monetizes” the debt by printing more money and creating serious inflation.

$150 billion on war spending is indeed problematic when our open borders are putting economic strains on sanctuary cities like New York and Los Angeles. It’s just not fair to spend $billions on other countries when we need it at home. But $150 billion pales in comparison to interest on our enormous debt.

The real problem lies with interest on our debt that is currently 2% of $33 trillion, so $660 billion which is 11% of current spending. But this interest is heading toward 5% and maybe even higher, which is $1.7 trillion if debt remains at $33 trillion, which it won’t. $1.7 trillion is 30% of current spending . This will either crowd out other expenditures or escalate deficit spending way beyond control.

We can’t afford to pay 5% interest on a debt that exceeds $30 trillion.

What spending would you reduce in the following table from Fiscal Data? Keep in mind you’ve got to allocate 30% to Net Interest, which is 3 times the current 11%.

Source: Fiscal Data

When the bough breaks

There might have been a time when we could have both Guns and Butter but that was long long ago. We are facing a crisis created by decades of profligate spending. The bills are coming due, and they won’t wait for our kids’ kids’ kids.

As I’ve recommended in the past, inflation protection should be considered like TIPS, precious metals, some real estate, etc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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