Rep. Matt Gaetz (R-FL) and Co. couldn't have picked a worse time to sink the nine-month House speakership of Rep. Kevin McCarthy (R-CA).
The defenestration of McCarthy by Gaetz and seven fellow dissident House Republicans supposedly happened over the then-speaker's unwillingness to confront profligate federal spending. Three days later the world got set on fire, as Hamas terrorists killed more than 1,000 people and wounded at least 2,800 in Israel, the worst mass slaughter of Jews since the Holocaust. That left the House without a speaker — its institutional leader — at a time of grave international crisis.
BIDEN TRIES TO KEEP FOCUS ON ECONOMIC POLICIES AS WAR IN ISRAEL RAGES
By this time, too, a domestic economic crisis was already at hand. Treasury yields were soaring, in a clear signal to Congress that the country must rein in its deficit spending.
Gaetz contends rising red ink threatens the nation's fiscal future. And he's not wrong. But making McCarthy a scapegoat for runaway Washington spending does nothing to solve a problem that, if left unchecked, will force future generations to pay more just to make America's interest payments on the national debt.
Gaetz and GOP allies got on McCarthy for not trying to force President Joe Biden and Senate Democrats to swallow high enough cuts in domestic spending. But only a quarter of federal spending is discretionary. Rather, the mandatory spending that funds our entitlements comprises a staggering three-quarters of the federal budget. That’s where most projected spending in the looming explosion will come from, and it’s why the bond market is panicking.
Bond yields, which move inverse to their prices, are not high, historically speaking. A 5,000-year analysis of historical interest rates by Bank of America proved that Jesus was furnishing homes purchased with mortgage rates on par with our 8% rates; it was the zero-interest rate policy of 2008 through 2021 that was historically anomalous.
Yet the bond market meltdown is momentous simply because of the scope of America’s outstanding debt. The last time bond yields were this high, the national debt was only 35% of our annual economic output. Considering that the ratio is now nearly 1-to-1, rising interest rates are three times as punitive as they were in 2007.
Although the Congressional Budget Office projects that net payments on interest will outpace our total defense spending by 2030, the CBO doesn’t account for rising interest rates. Hence, the Manhattan Institute warns us that interest payments will cost a full half of all incoming tax revenue by 2051 if interest rates remain at their current historical average.
The Federal Reserve now predicts that its benchmark federal funds rate will remain north of 5% through the end of next year. And as evidenced by the 10-year Treasury's explosion to nearly 5%, the bond market finally believes the central bank. This reckoning with reality has resulted in a negative 10% return on Treasurys just since the start of this year. According to Bloomberg columnist Niall Ferguson, that annualized rate of 17.3% is the worst year for the bond market since 1871, or 152 years.
And yet, Congress doesn't care. While the crazy eight blew up whatever limited institutional power it had to slow down the spending, Democrats under Biden have gone into spending overdrive. Despite the U.S. being in a sustained period of economic growth and not currently in a war, the federal deficit will top 7% of our GDP this year, an unprecedented ratio for a time of peace and devoid of recession. At the same time, Biden's regulations and outright alignment with striking unions are further compounding the problem that limits economic growth.
CLICK HERE TO READ MORE FROM THE WASHINGTON EXAMINER
If Gaetz is serious about slowing spending, House Republicans need to reconvene and raise the retirement age for Social Security and Medicare, cap benefits, and consider expanding the payroll tax base. While McCarthy's methods were solid so long as Democrats continued to control the Senate and the White House, Gaetz could come up with the entitlement reform framework ready for a Republican president to sign into law on day one in office with all of their political capital still intact.
Of course, all of this would require taking Gaetz at his word. If he doesn't follow through, expect the bond market to remind Washington that if it continues to rely on investors for funding, investors will continue to jack up their prices.