The Federal Revenue Ceiling Problem

Añadido: 2026-06-02

[00:00:00]But as I stated at the beginning of the video, this time is different >> [laughter] >> because they cannot afford to do the same thing that they did in the 1970s when inflation really ripped out of control. On this last big move from 1978 through 1980 as inflation ripped higher from 6% up to 14.5% you can see the federal funds rate went from 4.5% all the way up to 20%. But they were only able to do that because of the amount of debt that the US government had at that time relative to the size of the economy. In other words, the government could afford to pay higher those higher interest rates as the Fed jacked those interest rates up.

[00:00:40]You see what the Federal Reserve's changing of interest rates did to the 10-year Treasury yield. This was about 1962, so this was in the beginning of that inflation and interest rate cycle.

[00:00:51]You can see the yield on the 10-year went up first to about 8%, then back down to six something, and then back up to about eight, and then down to about seven, and then finally it peaked out around 15%. Can you imagine getting 15% on a risk-free US Treasury government bond? Can you imagine the government actually being able to afford to pay that? Now right now the 10-year yield is peaking above 4.5%, and yet the total amount that the US government is forced to pay on their national debt just at the these interest rates is over a trillion dollars a year.

[00:01:27]So why is that a problem? Well, it's because of this chart right here, which is federal receipts as a percentage of GDP. This chart shows that pretty much no matter what the federal government tries to do with tax rates, it's really never able to get above that 17.5, maybe 20% mark for how much money it can suck away from the economy without crashing the economy. Whether tax rates go up or tax rates go down, the percentage that the US government is getting from the economy is very, very stable over time.

[00:02:01]This is because if they raise tax rates too much, it hampers the economy, stifles growth, and they suck more percentage away from the economy, but the economy shrinks. On the other hand, if they lower tax rates, then the economy grows, and they're able to collect more revenue, even though it's a smaller percentage. And so, there's this cycle where they're able to get a little bit more, and then a little bit less, but over time it stays very, very stable, despite the fact that we've had all sorts of different tax regimes, tax brackets, corporate tax rates, individual income tax rates, the government is always only able to suck around 17 and 1/2% of GDP out of the economy. And this is a problem because at their current debt level, with the amount of money that it costs them to keep that debt around, they need to suck away way more than that from the economy.