Can a Genie and Three Wishes Solve the U.S. Deficit Problem?

If a genie granted Joe Biden and Jerome Powell one wish each, what would it be? The Federal Reserve chairman would ask for inflation to return to its target rate without triggering a recession. The president would probably ask to be reelected, in which case he would have to ask the genie for one more wish—money to fall from the sky so he could pay off U.S. debt. There’s only one problem: If money fell from the sky, inflation would most likely follow, canceling Powell’s only wish—and that wouldn’t be fair. The genie would have to break the news: To reduce debt, you have to increase revenue, cut spending or implement a combination of both. Currently, we’re looking at impossible math that even a genie can’t solve. 

The national debt has exceeded $33.6 trillion, and the federal government keeps adding over $1 trillion each year to the shortfall. As interest rates stay elevated and debt continues to increase, interest payments will further increase in the coming years, adding to the deficit, which will add to the national debt—which will lead to higher interest payments. It’s a vicious cycle. 

Then there’s inflation, which requires spending increases—for example, the inflation adjustment for social benefits. These increases will further add to the deficit and the national debt. Furthermore, we have a series of federal bills that will spend trillions of dollars over a multi-year period. While we see a lot of additions on the expenditure side, there isn’t any concrete plan to add to the revenue side. At a time when Americans are clearing out their savings to cover rising living costs, raising taxes may prove to be unpopular. 

Unfortunately, the U.S. Treasury has lost a nice source of revenue from the Fed. The Fed used to make on average $100 billion a year over the past 15 years, which it handed over as profit to the Treasury. With its current tightening efforts, the Fed is spending more on interest payments than it makes from its asset holdings, losing over $100 billion since last year. No more free money for the Treasury! At this point, the national debt issue may need a lot more than three wishes from a genie.