Solutions Economic and Market Watch

Welcome to the Economic & Market Watch podcast for the week of September 22, 2025. This is Antony Davies.

The federal government currently spends an average of $19.4 billion per day. In the fifteen seconds since this episode started, it has spent over $3 million. That will add up to a total of $7 trillion this year. On the other side of the ledger, the government will collect $5.2 trillion in taxes.

Now imagine that the government received the full $5.2 trillion on January 1 and then started spending at a constant $19.4 billion per day.

At some point in the year, the money will run out. We call that Deficit Day.

This year, Deficit Day fell on September 21. That's the day the government spent the last penny of the $5.2 trillion it collected.

But the government keeps on spending. Every day from September 22 until the end of the year, the government will charge another $19.4 billion to its credit card.

If the budget were balanced, the government's tax revenue would last the whole year, and Deficit Day would fall at midnight on New Year's Eve. But when the government runs a deficit, the money runs out before the end of the year. The bigger the deficit, the sooner Deficit Day arrives.

On average, since 2001, Deficit Day has fallen around September 12. That's like a household running out of money a week before the end of the month — every month — for twenty-five years.

The latest Deficit Day in recent years was November 15. That was in 2017, when the federal government spent a buck-twenty for every dollar it collected in taxes. The earliest was April 30, 2020, when the government cut all those COVID stimulus checks and spent around $3 for every $1 it collected.

When comparing countries, it's typical to describe the debts as fractions of GDP. The U.S. government's debt is 125% percent of U.S. GDP. Other top countries include Japan at 237%, Italy 135%, and France 113%. But because the government doesn't own the GDP, comparing debt to GDP only tells us how big the debt is, not whether the government can afford it.

It's like comparing your household's debt to your employer's profits. You don't own the profits. Your employer does. A better measure is the government's debt to the government's income. That's the same measure mortgage lenders use.

In 1981, the government's debt was 1.6 times its tax revenue. The rule of thumb when buying a house is that your mortgage should be less than five times your annual income. If anything, the government could have afforded more debt in 1981 — and take on more debt, it did.

Today, the government's debt is more than seven times its annual income. If today's government were a home buyer, lenders would be turning it down.

But unlike with a mortgage, the government doesn't need to pay off its debt. It only needs to make the minimum payments. Even that, however, is becoming a problem. The government currently pays an average interest rate of 3.4% on its debt, but 3.4% on $37 trillion is a whopping $1.2 trillion per year. For perspective, each year, interest on the debt costs the government one and a half times what the entire Department of Defense costs.

What scares economists most is that a small change in interest rates now has large fiscal implications. Just a one percentage point increase in interest rates would eventually cost the government an additional $400 million per year in interest expense. Adjusted for inflation, that's double the annual cost of the Iraq War — and this has dire implications for monetary policy.

The Fed has two goals: to maintain full employment, and low inflation. The burgeoning debt is creating a third goal: to maintain the government's solvency.

As the debt grows, that third goal will overshadow the other two, forcing monetary policy to conform to fiscal policy. The Fed will gradually cease to be a stabilizing hand on the economic rudder as it's forced to become the government's ATM. This means that low inflation is a thing of the past.

Already inflation is running a full percentage point above its pre COVID average. Increased government borrowing will put upward pressure on interest rates. To alleviate some of that pressure, the Fed will cut short term rates. The money supply will grow and that will push inflation higher.

The take home for Americans is to expect long term rates to remain elevated and to get used to a new normal of elevated inflation. Like a household, a government can't keep spending beyond its means. Unlike a household, it can force others to pay the price for its irresponsibility.

Happy Deficit Day.

This is Anthony Davies for the Economic & Market Watch podcast. Thank you for listening. For more details on Deficit Day, download the weekly economic and market watch intelligence brief and dashboard, and send us email at economicresearch@nrucfc.cop.