RUTHFULLY YOURS

In the Pacific, China threatens Taiwan with a large military buildup and near-daily provocations. To the extent China is supporting Russia’s war in Ukraine with more than words, the two are already cooperating more closely than Germany and Japan did in World War II.

In its economy of effort, this column has mostly sat out the inflation discussion, except to emphasize how the current puzzle differs from the 1970s. Then it was poorly conceived regulatory and tax systems, which Carter-Reagan reforms addressed with more suavity than was apparent at the time. Today’s vulnerability is different: the government’s gross overreliance on debt financing to give voters stuff without taxes to pay for it. Distorted, in ways many of us don’t recognize anymore, is our every choice of whether to work, how much to save, how much of our incomes to allocate to healthcare or homeownership or a college degree of questionable value in the marketplace.

All this will be changing in ways that will likely sneak up on us. When Jimmy Carter was president during the last big inflation, government debt was 34% of GDP. Now it’s 122% not counting $78 trillion in unfunded Social Security and Medicare obligations. In two years, the average interest rate on the U.S. debt has almost doubled, to 2.97%. Interest payments have more than doubled, to $985 billion, exceeding the defense budget.

This is just the beginning, short of a growth miracle. The truncated duration of our outstanding debt plus 10-year rates over 4.5% mean interest expense will soon outstrip $1.4 trillion in annual Social Security spending. So large is the wave of expected borrowing that Wall Street this week is signaling doubts about the global public’s willingness to fund it.

On top of this comes a need for a big investment in American rearmament.

Now you know why, between his drunken threats of nuclear war, Putin understudy Dmitry Medvedev sprinkles his social-media posts with sardonic comments about Western fiscal management. Phillips O’Brien, the military historian and Ukraine war student from the University of St. Andrews, puts it aptly in his Substack: “The return of conventional war is perhaps the single most important strategic development of this era, and it’s one that we must try to understand, prepare for (and ultimately try and prevent).”

If war is one unhappy surprise, a second is the failure of the super-low interest rates of the previous decade to be restored even as inflation is allegedly in retreat. “The usual suspects [Fed tightening, inflationary expectations, etc.] can’t explain it,” said the Journal’s Greg Ip this week in a widely noted commentary.

Proving it’s easy to predict the future as long as you don’t say when, this column expected as much seven years ago: “Today’s ultralow, even negative, interest rates and apparently low inflation are taken for granted by the secular stagnation theorists. It’s a view that seems implausible in light of the industrial world’s debts.”

If rates are normalizing, no longer sustainable are government’s runaway borrowing and the government-sponsored incentives that go along with it.

A good outcome isn’t guaranteed, but if our politicians live up to their forebears of the Carter-Reagan era, the country can muddle its way to a new era of prosperity and security. You and your family just have to survive economically in the meantime. The U.S. banking system is weighed down by $2 trillion in underwater Treasurys bought when rates were near zero. Commercial real estate teeters as owners must refinance half-empty buildings at today’s higher rates. Sparks for a global financial crisis aren’t in short supply, perhaps starting in Italy, perhaps before the U.S. presidential election.

Down the road, Social Security will become effectively means-tested as government resorts to the predictable expedient of taxing away the benefits of higher-income seniors. Medicare will be a refuge for poor seniors as wealthier ones give up on long waiting lists, poor service and dingy surroundings. Then there’s the great-power war that may be forestalled only if the U.S. is willing to undertake a massive investment in deterrence not yet visible in the cards.

I might dissent slightly from a

analysis cited by Mr. Ip, tsk-tsking over the chaotic leadership fight in the U.S. House as unfitting a country with our fiscal challenges. I 100% guarantee, whether the U.S. deals with its debt-sustainability problems clumsily or very, very clumsily, redirecting the fiscal ship will be a chaotic process. If chaos and hair pulling aren’t abundantly evident, it means America’s debt crisis—and the many unhappy trade-offs it will occasion—has yet to bite.