Here's a shocker! Over the next decade the U.S. government is expected to rack up $9 trillion in debt. More than half that amount, $4.8 trillion, will be in interest payments.
To further emphasize the depth of the problem, in 2015 interest due will be $533 billion, equal to 1/3 of the federal income taxes!
Right now, the Treasury is in a sweet spot with regards to interest payments. With interest rates at near zero, we are able to finance trillions of dollars of debt with practically no interest payments. That scenario is about to change. The change could be rather quick. If the economy heats up, interest rates will rise and so too will interest payments. Because the debt is so large, only a small rise in interest payments could increase the interest burden by a large amount.
The government is continually refinancing existing debt. When a bond comes due, the Treasury must repay the face amount of the bond, plus interest. As interest rates rise, as they are expected to, the entire refinance process is more expensive. Bonds are issued at higher rates and more interest is tacked on, thus increasing the overall interest payments.
The Obama administration is caught between a rock and a hard place. On the one hand more money is needed to stimulate the economy. On the other hand, there is extreme pressure to cut expenses to bring down the debt. How this dilemma will play out is yet to be seen.
Do you have any ideas for reducing the federal debt?
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