Low Interest Rates Hid True Cost of Increasing Debt
House mortgage-type instrument suggested as means to pay off national debt
Guest Post By Lee A. Presser
Interest rates have been held artificially low by the Federal Reserve since 2008. This has had the effect of hiding the true cost of increasing debt. As interest rates rise back toward 4%, the U.S. Treasury will have less money to spend on discretionary governmental functions.
The FY 2015 budget is approximately $3,900,000,000,000.00. Another way to look at that number is about $12,187.50 per person for all 320,000,000 people in the U.S.
The $3.9 Trillion budget has been divided by the Treasury into three main categories; mandatory spending, discretionary spending, and interest costs. In FY 2015 mandatory spending will equal 65% of the budget. Mandatory spending is America’s entitlement programs. Discretionary spending is everything else including the military, except interest costs.
The interest amount paid on the United States national debt may be about to sky-rocket as interest rates in the U.S. return to 4%. Instead of paying $430,812,121,372.05 interest at an average 2.401% rate as the Treasury did in Fiscal Year (FY) 2014, the amount may soon grow to $769,861,040,000.00 if rates return to 4.188%, the average rate at the end of FY 2008. (Treasury Department websites https://www.treasurydirect.gov/govt/reports/ir/ir_expense.htm and https://www.treasurydirect.gov/govt/rates/pd/avg/2008/2008_09.htm)
The $769.8 Billion calculation is based on the debt amount as of September 30, 2014. The actual amount of interest paid when rates return to 4% will be based on a larger amount than the $18 Trillion owed September 30, 2014. When the amount owed reaches $20 Trillion, the annual interest amount paid could be as high as $855,401,140,000.00 (based on a 4.188% rate rather than a 2.401% rate).
A debt generally refers to money owed by one party, the debtor, to a second party, the creditor. Debt is generally subject to contractual terms regarding the amount and timing of repayments of principal and interest.
National debt is the money owed by the central government (in this case the United States Treasury) to its creditors; those who loaned it money at interest. The national debt is different than the annual deficit. The deficit measures the amount the debt has increased from one year to the next year.
The interest rate paid by the U.S. Treasury on its debts varies depending on the contract it signed with each creditor. The “interest bearing debt” generally falls into two categories; “marketable” and “non-marketable” securities. The average interest rate of all the subcategories making up the “marketable” and “non-marketable” securities is called the interest rate on the “Total Interest Bearing Debt.”
At the close of FY 2007, the “Total Interest Bearing Debt” rate was 5.009%. By the close of FY 2008 the rate declined to 4.188%. At the close of FY 2014, the “Total Interest Bearing Debt” rate was 2.401%. (Treasury Dept. website https://www.treasurydirect.gov/govt/rates/pd/avg/2014/2014_09.htm)
When interest rates rise and the debt continues to increase (because of deficit spending), the United States Treasury has less dollars to spend on discretionary governmental functions. Since interest must be paid to avoid default, discretionary spending must be cut. The other option is to increase the deficit and add to the debt. A larger debt results in increased interest costs in the coming Fiscal Year.
A change in trajectory is needed to avoid financial disaster. Perhaps the solution is to assign the federal debt to a 30-40 year mortgage and pay it off like a house payment. As the debt amount declines, more money will be applied to principal. Of course, no addition debt can be added. Increased expenses must be paid from current income and/or from increased taxation.
If Congress cannot agree to control itself, financial disaster is predictable and has been explained above.