Newt Gingrich and former Federal Reserve Bank President Thomas Hoenig examine how the national debt doubled in less than a decade and what it will take to change course.
The federal debt has crossed $40 trillion, reaching a milestone few Americans could have imagined only a generation ago. Even more troubling is how quickly it happened. In this episode of Newt’s World, Newt Gingrich sits down with economist Thomas Hoenig, former president of the Federal Reserve Bank of Kansas City and former vice chairman of the FDIC, to examine how decades of federal spending, borrowing, and extraordinarily easy monetary policy helped create the situation America faces today.
Hoenig argues that the problem goes far beyond a number on the federal balance sheet. As interest payments consume a growing share of federal resources, government borrowing competes with private investment, inflation threatens purchasing power, and future generations inherit the consequences of decisions made today. Yet the conversation is not simply a warning. Gingrich and Hoenig look to periods after World War II and during the balanced-budget years of the 1990s as evidence that America can change direction. The question is whether political leaders can build the public understanding and discipline necessary to do it before $40 trillion becomes $50 trillion.
Listen to their conversation below, or scroll down for an edited transcript.
Can America Balance the Budget Again?
This conversation is part of a much larger question about America’s fiscal future. Explore We Can Balance the Budget Again, a Gingrich 360 collection featuring Newt Gingrich’s conversations on balancing the federal budget, lessons from the balanced-budget years of the 1990s, and a practical budget workbook that lets you examine the choices Washington faces.
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Edited Transcript
This conversation has been condensed and lightly edited for clarity.
Newt Gingrich
Last week, the federal government’s total debt crossed $40 trillion, a record that arrived months earlier than official forecasters expected and less than a decade after the number stood at $20 trillion.
Net interest on that debt is now running above $1 trillion a year, more than the federal government spends on national defense or Medicare. It shows up far beyond Washington’s ledger in mortgage rates, car loans, and the shrinking room Congress has to do much of anything else.
To explain how we got here, I’m joined by Thomas Hoenig, who spent 38 years at the Federal Reserve, including two decades as president of the Federal Reserve Bank of Kansas City, and later served as vice chairman of the FDIC.
Tom, when you see the nation’s debt growing as rapidly as it has since 2010, how do you analyze that?
Thomas Hoenig
Unfortunately, I think part of it is the fact that Congress got used to the Federal Reserve accommodating it by suppressing interest rates for well over a decade, making the ability to borrow inexpensive.
When you can borrow without limit, increase entitlements and spending, and not feel the immediate consequences, you become used to that.
Following the Great Financial Crisis, we engaged in massive spending programs, and the Fed accommodated that with quantitative easing. Even as the economy recovered, the Fed continued buying tens of billions of dollars of Treasury debt and keeping rates very low.
Then COVID came, along with enormous spending programs. Even as the pandemic receded and the economy recovered, the Fed continued buying $120 billion of new debt every month.
The government could spend freely, and the Fed accommodated that.
Now Congress continues to spend well beyond what it brings in through revenue. We have $40 trillion in debt, and if we continue at this pace, we will have more than $50 trillion in five years.
We have to change our habits. We have to spend less, raise revenue somehow, or both.
Newt Gingrich
If the Fed had been more restrictive over the last 30 years and therefore forced Congress to pay more attention, would that have led to a series of recessions? What would the real-world economic impact have been?
Thomas Hoenig
I think a more cautious Federal Reserve would have produced better outcomes in the long run.
If the Fed had made it clear after the financial crisis that it was not going to continue monetizing the debt through large quantitative easing programs, it would have forced Congress to address its responsibilities.
Look at two periods when Congress stepped up. After World War II, the deficit and debt declined. Then from the mid-1990s to 2000, the debt declined again. The economy did well during both periods.
Real growth averaged around 4 percent, roughly double what we expect today if we get 2 percent.
After World War II, debt was around 120 percent of GDP, and we brought it down carefully. We could do it again.
Newt Gingrich
You get a crowding-out effect where the government is absorbing capital to sustain the debt that otherwise could have gone toward investment in new products and services. Is that a fair concern?
Thomas Hoenig
Yes. With the competition today for private capital, including AI investments and rebuilding manufacturing in this country, you have competition between the government and private sector.
If you don’t address the debt and deficit, crowding out has to take place, or you have massive inflation if the Fed monetizes that debt.
We have to think longer term and ask how we bring this debt under control in a sensible way over time. You don’t want to put the economy into a terrible crash, but you do have to act.
Newt Gingrich
I look back at the four balanced budgets we achieved in the 1990s. Alan Greenspan was actually testifying that they thought we could pay off the federal debt by 2009.
It’s difficult for me to understand how we went from that trajectory to such a dramatic shift toward fiscal irresponsibility.
Thomas Hoenig
We had a surplus, and then we decided to do more in terms of social programs. They may be well-intended, but they aren’t free.
You have to pay for them. You either raise taxes or borrow money. The choice was to borrow because the Fed enabled borrowing at very low rates.
Now we are beginning to see the consequences.
We keep doing things that put salve on the wound instead of healing the wound. We have to think differently.
Newt Gingrich
You’ve also raised questions about the decision more than half a century ago to go off the gold standard. Why does that moment still matter today?
Thomas Hoenig
We went off the gold standard while we were spending more than we were taking in. We had the Great Society programs and the Vietnam War. Countries were redeeming their dollars for gold, and we feared running out of gold.
When we abandoned the gold standard, we gave up an external discipline on Congress, the administration, and the Federal Reserve.
We then gave the Federal Open Market Committee authority over how much money to create. That made monetary policy more vulnerable to political pressure.
Over time, that allowed debt monetization to grow, and it accelerated dramatically after the Great Financial Crisis through quantitative easing.
Newt Gingrich
In a democracy, isn’t the political bias almost always going to favor inflation rather than tightening the belt?
Thomas Hoenig
Absolutely. The nature of the political system is short-term.
We tell ourselves we’ll get through this period and take care of the problem later. But that period never comes because there is always another reason to spend.
If you reduce taxes, you have to make sure spending is in line with that. If you increase spending, you have to find the revenue.
Instead, the easy road is borrowing money and then printing money to fund it. Those short-term decisions lead to inflation and threaten long-term decline.
Newt Gingrich
You’ve pointed out that Japan’s debt is largely held internally, while the United States sells bonds around the world. Is that a significant difference?
Thomas Hoenig
Yes. Japan has large internal debt, but it also has a large external surplus.
The United States runs significant trade and current account deficits. We buy the rest of the world’s goods, and we depend on the rest of the world to buy our debt.
We are also the world’s reserve currency. That privilege can become a curse because it allows us to be irresponsible for longer periods of time.
Newt Gingrich
Is there a parallel between what we’re seeing and the gradual decline of the British pound?
Thomas Hoenig
In a sense, yes.
As Britain fought two world wars and its empire shrank, its ability to fund its debt and grow came under pressure. The United States became the dominant economic force, and the dollar became the dominant currency.
China is nowhere near ready to become the world’s reserve currency. It has capital controls and other limitations. But look at how far China has come industrially in one generation.
Don’t underestimate what could happen in the next generation. We should correct our own habits so the United States remains the natural economic leader of the world rather than undermining the value of our currency.
Newt Gingrich
At this level, the debt may not mean an immediate financial crisis, but it can steadily weaken the system.
Would your primary focus be to profoundly reform spending?
Thomas Hoenig
That’s the only solution.
It requires leadership in Congress, politics, and the Federal Reserve to explain the problem clearly and persistently to the American public.
We need to reform our spending. If we don’t, we will spend ourselves into a crisis.
I remember the Contract with America. Everyone knew about it. They understood it and knew where it was going. It was difficult, but it was accepted because it was explained.
When the American people understand the problem and the sacrifices required, they can accept reform. But it has to be shared sacrifice.
Newt Gingrich
That requires a serious national conversation about the mess we’re in. Before getting into every detail of how to solve it, we have to establish the principles for getting out of it and build a public consensus.
We have to have a conversation with ourselves as a people before we can expect politicians to take the steps they’re going to need to take.
Thomas Hoenig
I fully agree.
I can go almost anywhere in the country and convince people that we need to address the deficit. They agree until you mention something that affects them.
That’s because people think they have to sacrifice alone. They don’t.
We all have to participate. There has to be sacrifice on everyone’s part, and importantly, it has to include the spending side.
We have to establish our priorities, find compromises, and begin addressing our national problem.
Newt Gingrich
Federal Reserve Chairman Kevin Warsh has said restoring inflation to the Fed’s 2 percent target is among his highest priorities.
Is 2 percent the right target, or should zero inflation be the target?
Thomas Hoenig
Two percent inflation is not stable prices.
The law says the Federal Reserve should pursue stable prices. Two percent inflation systematically devalues your currency over time.
Zero inflation over time should be the goal. If you’re a little under for a while and a little over for a while, that’s perfectly okay.
Mild deflation can temporarily increase a wage earner’s purchasing power rather than producing a consistent decline in purchasing power.
If you get inflation to that level and bring the debt down, businesses have more confidence to invest. You can get better growth.
That’s part of why I think we saw roughly 4 percent growth during the latter part of the 1990s as the debt came down and we reached a surplus. It didn’t turn into a recession. It turned into growth.
Newt Gingrich
The debt is on a pace to reach roughly $50 trillion without a change, which means interest payments will continue rising.
Can we bend the curve before we reach $50 trillion, or will it take a major crisis?
Thomas Hoenig
I think we can bend the curve if Congress decides to do so.
If Congress, the administration, and the Federal Reserve decide to act, we can bend the curve.
One goal that has been discussed is getting the deficit down from 6 percent of GDP to 3 percent. If you can do that, I think you would do a great deal to get the growth rate above 2 percent and begin growing your way out.
You don’t have to do it overnight.
When things start going in the right direction, success can snowball. Right now, we’re snowballing toward $50 trillion in less than five years.
We need to bend the curve, and we can if we choose to do so.
Newt Gingrich
One thing you’ve inspired me to think more about is what all of this means for a 20-year-old.
The amount younger Americans are going to pay in interest on the debt during their lifetimes is part of the affordability problem. We need to help them understand the burden their elders have placed on them and why getting the budget under control matters.
Tom, thank you for joining me.
Thomas Hoenig
It’s the 20-year-olds who have to understand this and become part of the public that convinces Congress to correct its ways.
Thank you for having me. I’ve really enjoyed it.
About the Guest
Thomas Hoenig spent 38 years at the Federal Reserve, serving as president and CEO of the Federal Reserve Bank of Kansas City from 1991 to 2011 and as a member of the Federal Open Market Committee throughout his tenure. From 2012 to 2018, he served as vice chairman of the Federal Deposit Insurance Corporation, where he oversaw bank supervision, deposit insurance pricing, and financial stability.
Hoenig holds a Ph.D. in economics from Iowa State University and is a distinguished senior fellow at the Mercatus Center at George Mason University. He also writes the FinRegRag newsletter on Substack.
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