We at CFIF have consistently highlighted the peril of federal, state and local government efforts targeting…
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New Study Shows How Overregulating Short-Term Lenders Harms Consumers

We at CFIF have consistently highlighted the peril of federal, state and local government efforts targeting the short-term consumer lending sector.

Less than two years ago, we specifically sounded the alarm on a New Mexico law artificially restricting interest rates on short-term consumer loans.

Well, a new study entitled "A New Mexico Consumer Survey:  Understanding the Impact of the 2023 Rate Cap on Consumers" that surveyed actual borrowers confirms our earlier warnings:

Key findings include:

•Short-term,small-dollar loans help borrowers manage their financial situations, irrespective of the borrower’s income.

•The rate cap has failed to improve the financial wellbeing of New Mexicans, specifically those who had previously relied on short-term, small-dollar loans.


November 27, 2023 • 03:57 PM

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Americans Learned a Financial-Crisis Lesson. Washington Did Not. Print
By Veronique de Rugy
Thursday, October 19 2023
This scenario paints a picture of a government caught in a fiscal straitjacket.

Congress and the Biden administration seem unaware that rising interest rates are about as "transitory" as they told us inflation would be  meaning, likely to be around for quite a while. Why does this matter? Ask someone who's been enticed by a mortgage with a variable interest rate that starts low and then rises quickly when conditions change.

Over the past month, yields on 10-year notes have risen sharply to 4.8%, well above the prevailing rate over the past 16 years. Meanwhile, two-year Treasuries are paying a 5.2% yield, and three-month Treasury bills are paying 5.5%  much higher than the rates projected by the Congressional Budget Office (CBO) in February. For this quarter, CBO assumed a ten-year yield of 3.9%; it's currently 4.7%.

Interest-rate increases might not worry those who have locked in low rates on their mortgages or car loans or who have wisely invested in government bonds. But the hikes will be painful for the federal government, which has done a lot of short-term borrowing.

Most households have been smart to protect themselves from fluctuating interest rates. The Wall Street Journal reported in July that, according to Moody's analytics, "only 11% of outstanding household debt carried rates that fluctuated with benchmark interest rates." Americans learned the risk of variable rates during the last recession. The government didn't.

The latest Treasury data show that the average maturity of U.S. government debt is only 73 months. One-third of this debt has a maturity of a year or less and 53% has a maturity of three years or less. That means that half must be rolled over on a very short-term basis (meaning paid back and borrowed once again) only to face higher rates. That's a big deal considering our growing $25.8 trillion debt.

If you follow such things, you know that as rates rise, the cost of servicing the debt swells. The CBO's Monthly Budget Review highlights the problem's scale. It estimates paying $711 billion in net interest this fiscal year. If you add to this the Federal Reserve's FY2023 operating losses of $100 billion  as Joint Economic Committee Chief Economist Chris Russo suggests we should  you get around $810 billion. That's 3.1% of America's GDP, more than double the interest payments for the previous year.

On average, current rates are about one percentage point above those assumed in the CBO's baseline. But what if that gap were to continue over the next 10 years? In that case, debt would grow by an additional $2.8 trillion, on top of the $45.2 trillion the government will have accumulated by 2033.

Now, if higher debt with no real repayment plan has no other economic consequences than slower growth, greater risk of financial crisis and less ability to respond to emergencies  all of which are bad enough on their own  then CBO projects that net interest will consume 23% of spending and roughly 40% of federal revenue by 2053.

Think hard about that.

What if interest payments alone (not including principal, tax or insurance) on your house, car and credit card made up 40% of your wages and a quarter of your spending? Forget about vacations and restaurants and maybe even adequate housing, food and health care.

This scenario paints a picture of a government caught in a fiscal straitjacket. Now, imagine the hard choices our government will need to make between, for example, defense and social welfare.

But the reality is even more brutal. Academic studies find that each percentage-point increase in the debt-to-GDP ratio raises the real interest rate. In other words, higher rates lead to more debt, and more debt begets higher rates, and on and on. Further, it's utterly unrealistic to project that an increase in the debt from 97% to 181% of America's GDP will not fuel higher inflation.

Today, inflation has fallen but remains uncomfortably above the Fed's 2% target, and it's premature to declare victory. Indeed, if those rising interest payments are paid with more borrowing as opposed to spending cuts or tax hikes, as is projected by CBO, it risks inflation again accelerating. That would require more rate hikes and it would launch us on a nasty path resembling the 1970s and 80s. The difference is that back then, the debt was only 25% of GDP.

Get the picture? If Congress continues to refuse to cut spending, we could be in for even more serious pain than we're suffering today.

Veronique de Rugy is the George Gibbs Chair in Political Economy and a senior research fellow at the Mercatus Center at George Mason University. 


Notable Quote   
"Congress just passed -- and President Biden just signed -- the latest short-term government funding bill to keep the government running.The bill, which essentially kicks the can down the road, ensures that taxpayers will continue to pay for a bloated government until January, Senate Appropriations Committee Chair Patty Murray (D-WA) said: '...avoiding a (government) shutdown is so very far from mission…[more]
— Cal Thomas, Syndicated Columnist
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