Sunday, July 31, 2011

Interest on the United States Debt - An Unsustainable Scenario

While everyone is gaga about the pending debt deal that is proposing to cut a couple of trillion dollars in spending over the next 10 years, I would not get too excited about the long-term impact of such a deal.  Sure it's a deal that prevented those in D.C. from having to actually haul out the rulers and unzip, but it is a poor one as far as American taxpayers should be concerned.  That pesky interest on the $14.343 trillion current debt is what makes the deal far less than a good one.

Here's a look at the interest payments on the federal debt over the past 9 months and annually all the way back to 1988 from the Treasury Direct website:

Notice how in the first 9 months of fiscal 2011 we've already exceeded the amount of interest owing for the entire 2009 fiscal year.  America is already at the fifth highest amount of annual interest on the debt and we're only nine months into the fiscal year.  Back in 2008, interest on the debt reached its record level of $451 billion, a record that is most likely going to fall in fiscal 2011.  What is even more frightening is that the interest record will be broken in a year where interest rates are at generational lows as you'll see in a moment.  

Here's a look at the current interest rates on the debt for both marketable and non-marketable federal debt securities for the month of June 2011 with a comparison to the rates from a year earlier:

Now, let's look back 10 years to June 2001 and see what interest rates on the federal debt looked like back then:

Notice that the rates for the previous year (June 2000) were even higher?  The total interest-bearing debt rate of 6.261 percent from June 2010 is over twice that of the current rate of 2.957 percent for the month of June 2011.

Here's a graph showing the yield on the 10 year United States government bond going all the way back to 1971:

Notice how the rate outside of the spikes in the early 1980s seems to hover around the 6 percent mark?  Scary, huh?  Notice that current 10 year interest rates really are at multigenerational lows?

The $300 billion in annual spending cuts most recently proposed will not even meet the budgetary needs to fund interest payments on the current federal debt.  This is even further complicated by the fact that the debt ceiling will be allowed to rise by another $2 trillion give or take a few hundred billion dollars.  If interest rates rose to the levels experienced back in 2001 as well they might should the market start demanding a risk premium as the federal debt rises higher and higher, annual interest payments on the new debt ceiling amount of $16 trillion would hit a stratospheric $960 billion more or less.  In fact, in this case, compounding will only make matters worse as the interest owing is added to the debt.  To put this $960 billion number into perspective, the Congressional Budget Office estimated at the end of fiscal 2010 that total Medicare and Medicaid outlays for fiscal 2010 reached $723 billion and Social Security benefits reached $696 billion.

If the debt situation is allowed to spiral to this level and interest rates rise to historic norms, the perfect fiscal storm will be entrenched and the Great American Dream will pretty much be over for Main Street.

Perhaps a bad deal from Washington is just that, a bad deal and nothing more.  But, with all the partisan hoopla that built up over the past weeks, perhaps's think that the unwashed masses outside the Beltway will be happy with just about anything.


  1. Glad to see i'm not alone in thinking this deal is pathetic. To the author, try visiting right now- you will be shocked by the current manifestation of their home page. You'd think this was the biggest news since WW2 ended...

  2. But Rev. Joe's wife is still smoken hot...

  3. Great Britain was the world's mightiest nation. Was. The United States is the world's mightiest nation. Currently is. Tomorrow was? Is China up next? This debt situation is not sustainable. The system is going to eventually collapse.

    Good article; good analysis.

  4. Interest on the debt is added to the debt.
    Actually, the interest on debt held by the public is supposed to be paid with general revenues, with an immediate budget impact.
    Interest on intragovernmental debt (such as the Social Security trust fund) is paid with Treasury debt.
    This is why since 2010, even though excess FICA taxes and interest exceeded expenditures, the interest tapped had to be redeemed in cash.
    This is because the interest was in the form of debt, and the only way to redeem it is in cash.
    The other option is to add to debt held by the public.
    This, however, will not increase the total debt as intragovernmental debt goes down by the same amount that debt held by the public rises.
    I can provide reputable government citations and links to support these statements for anyone who is interested.

  5. What happens when the interest rate goes to 10%, 15% and 20%.

    WE had these rates under another incompetent President!

  6. Debt is not a issue. Main Thing is They are taking a strong and best decision.