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Sunday, January 12, 2014 10:37 PM


When Will Interest on US National Debt Exceed $1 Trillion? When Will the Fed Hike Rates?


With all the talk of tapering and expected hikes in interest rates by the Fed, inquiring minds are likely interested in what happens to interest on the national debt if the Fed ever does hike.

I asked my friend Tim Wallace to graph that idea. The following charts from Wallace provide a clear answer.

In these charts we make the assumption that the Congressional Budget Office (CBO) is accurate in its assessment of future budget deficits.

Neither Wallace nor I believe those estimates, nor do we believe the Fed is going to be in a position to tighten when they suggest they might, but here are the charts for discussion.

National Debt Trendline



Projected Interest at Various Rates



Hidden Agenda

The current blended rate of interest on the national debt is a mere 2.4% according to the CBO.

The "optimistic" projection of $668 billion assumes the rate will stay below 3.1% through 2020.

With that in mind, please consider the Fed's 'hidden agenda' behind money-printing.

One of the most important reasons the Fed is determined to keep interest rates low is one that is rarely talked about, and which comprises a dark economic foreboding that should frighten us all.

Let me start with a question: How would you feel if you knew that almost all of the money you pay in personal income tax went to pay just one bill, the interest on the debt? Chances are, you and millions of Americans would find that completely unacceptable and indeed they should.

But that is where we may be heading.

But isn't it fair to ask what the interest cost of our debt would be if interest rates returned to a more normal level? What's a normal level? How about the average interest rate the Treasury paid on U.S. debt over the last 20 years?

That rate is 5.7percent, not extravagantly high at all by historic standards.

Do the math: If we were to pay an average interest rate on our debt of 5.7 percent, rather than the 2.4 percent we pay today, in 2020 our debt service cost will be about $930 billion.

Now compare that to the amount the Internal Revenue Service collects from us in personal income taxes.

In 2012, that amount was $1.1 trillion, meaning that if interest rates went back to a more normal level of, say, 5.7 percent, 85 percent of all personal income taxes collected would go to servicing the debt. No wonder the Fed is worried.
The above article did not show the charts, but we just did.

Shifting Goalposts

Really think the Fed is going to hike? They know they can't, and the Fed is disingenuous as to why.

A year ago the Fed was discussing 6.5% as a trigger point.

In December, the Wall Street Journal noted the Fed’s Shifting Unemployment Guideposts

Now, in the wake of a massive collapse in the labor force in which unemployment rate just dropped to 6.7% it's easy to understand why the goalposts shifted.

The Fed pretends its interest rate policy is about a dual mandate of jobs and GDP growth.

The above charts show the real reason for the shift: the Fed is in a box of its own making and it has no freaking idea how to get out of the box.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com


Copyright 2009 Mike Shedlock. All Rights Reserved.
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