The Economy

Does Anyone in Washington Do the Math?

March 23, 2012

The U.S. Treasury currently owes $10,700,000,000,000 (that is $10.7 trillion) in public debt. The average interest on that debt is 2.24%, which leaves the taxpayer with an annual interest payment of $225 billion. This would pay for half of the 2012-estimated payment for Medicare. $5 trillion of this debt is due in 36 months. $8 trillion must be refinanced or paid back within seven years. That is not an insurmountable problem as long as interest rates stay incredibly low. However, what happens when interest rates move up? Have you noticed lately that the U.S. Government Long-Term Bond Yields are edging up?

The government borrowed at an average rate over the last two decades of 5%. This would put the cost of interest payments at $535 billion, or more than this year's estimated Medicare bill. A 6% interest rate brings the bill to $642 billion.

Now factor in that the national debt will be only growing in the decade to come. What you end up with is the inescapable conclusion that the US Government will have to increase revenues in order to fund this spending problem. Even Paul Ryan's budget proposal calls for more and more government spending in the future.

A near-term solution would be to sell as many 10 and 30-year bonds as possible while interest rates are still low, thus locking in a long-term favorable rate. This cannot be mandated but it can be encouraged by offering interest rates that are more attractive to longer-term investors. We are going to sell the debt anyway, so the level of debt on the US is unchanged, but there is a long-term benefit. The longer-term impact is that the interest payments remain relatively affordable through time; especially as global inflationary pressures take hold. The Federal Reserve Board's Operation Twist is designed to do the opposite. The Fed is keeping interest rates low in order to hopefully stimulate the economy now and let the future take care of the payment problem.

You might take exception with the solution presented above. Perhaps you are of the mindset that we should cut spending, reduce the deficit, aim for a balanced budget, and start paying off national debt. That is a great idea, but the reality is we do not have enough time for half measures and the political arena does not seem to have the will to seriously cut back on spending, as witnessed by the failure of the Super Committee a few months ago.

About the Author

Alan Beaulieu Blog | President

One of the country’s most informed economists, Alan Beaulieu is a principal of the ITR Economics where he serves as President. ITR predicts future economic trends with 94.7% accuracy rate and 60 years of correct calls. In his keynotes, Alan delivers clear, comprehensive action plans and tools for capitalizing on business cycle fluctuations and outperforming your competition--whether the economy is moving up, down, or in a recession.

Since 1990, he has been consulting with companies throughout the US, Europe, and Asia on how to forecast, plan, and increase their profits based on business cycle trend analysis. Alan is also the Senior Economic Advisor to NAW, Contributing Editor for INDUSTRYWEEK, and the Chief Economist for HARDI.

Alan is co-author, along with his brother Brian, of the book MAKE YOUR MOVE, and has written numerous articles on economic analysis. He makes up to 150 appearances each year, and his keynotes and seminars have helped thousands of business owners and executives capitalize on emerging trends.

Prior to joining ITR Economics, Alan was a principal in a steel fabrication company and also in a software development company.