Interest on US Federal Government Debt:  Time Bomb

by Michael Pollaro

 

It is not talked about much, at least by mainstream analysts, but make no mistake, interest cost on US federal government debt is a time bomb, locked and loaded, and will blow the US federal government’s budget sky high.

The end of the 30-year bull market in US government debt, the end of record low interest rates, will light the fuse.

In my opinion, unless politicians decide to renege on the federal government’s obligations, it’s not a matter of if, it’s a matter of when.  And neither the US federal government nor the US Federal Reserve can do anything about it.

Interest cost on US federal government debt is determined by three factors:

(1) Outstanding debt of the government

(2) Interest rate paid on that debt

(3) Maturity distribution of that debt

Higher levels of debt mean a higher interest cost.  Lower levels of debt mean a lower interest cost.

Higher rates of interest on debt mean a higher interest cost.  Lower rates of interest on debt mean a lower interest cost.

And finally, shorter dated maturity distributions, leading to generally larger and more immediate refinancing needs, mean more exposure to interest rates, and therefore, a higher interest cost when rates are rising and a lower interest cost when rates are falling.  Longer dated maturity distributions, leading to generally smaller and less immediate refinancing needs, mean less exposure to interest rates, and therefore, a lower interest cost when rates are rising and a higher interest cost when rates are falling.

In 2009, the government’s interest cost was about $383 billion, 10.9% of total US federal government outlays and 18.2% of US federal government receipts.

At $11.9 trillion, US federal government debt is at a 50-year high.  US federal government debt has been growing at an annual rate of 8.5% since 2000, with 2009 debt up 19% from 2008.  As for the future, trillion dollar deficits and trillion dollar borrowing needs are as far as one can see.

Interest rates are at 50-year lows, and have nowhere to go but up.  Higher rates of interest do mean a higher interest cost.

Although not at historical lows, at 4 years, the average maturity on the government’s marketable debt is down 35% from the 2000 high and in the bottom 40% of this study.  The US federal government must refinance a huge $2.6 trillion of its debt in fiscal 2010 and $4.7 trillion of its debt in the next five years, and the US federal government will need to borrow money to finance a projected deficit of $1.6 trillion in fiscal 2010 and projected deficits of $5.7 trillion over the next 5 years.

Now do you see what worries me, and should worry every US treasury note buyer in the world?  That’s right, rising interest rates.

To size the scope of the problem, let’s have a look at US federal government interest cost at interest rates more in keeping with history:

 

Dollars in billions

US federal government debt at end of 2009 ---------------------- 11,900

Interest cost on US federal government debt at end of 2009:

3.22% (2009 interest rate) -------------------------------- 383

6.25% (2000 interest rate) -------------------------------- 744

10.25% (1982 interest rate) ------------------------------ 1,220

6.20% ( 50-year average interest rate) ----------------- 738

 

Projected US federal government debt at end of 2014 --------- 19,200

Projected interest cost on US federal government debt at end of 2014:

3.22% (2009 interest rate) -------------------------------- 618

6.25% (2000 interest rate) -------------------------------- 1,200

10.25% (1982 interest rate) ------------------------------ 1,968

6.20% ( 50-year average interest rate) ----------------- 1,190

 

If interest rates return to the long-term average rate in this study (a good long-term mean proxy as it spans one full bear and one full bull market) there would be an interest cost of $738 billion per year on US federal government debt if it were the same as US federal government debt at the end of 2009, and an interest cost of $1.19 trillion per year based on a projected deficit of $19.2 trillion at the end of 2014.  An amount equal to about 35% of US federal government receipts for 2009 would be spent on interest payments, and an amount equal to about 56% of projected US federal government receipts for 2014 would be spent on interest payments.

If interest rates were to overshoot that long-term average rate and return to the rates seen during the inflationary 1970's and early 1980's, there would be an interest cost of $1.22 trillion per year on US federal government debt if it were the same as US federal government debt at the end of 2009, and an interest cost of $1.968 trillion per year based on a projected deficit of $19.2 trillion at the end of 2014.  An amount equal to about 59% of US federal government receipts for 2009 would be spent on interest payments, and an amount equal to about 91% of projected US federal government receipts for 2014 would be spent on interest payments.

End of article by Michael Pollaro

 

Summary

by Larry McCart

Zionists and communists have been looting the US Treasury for many years.  When the US federal government can not lawfully collect in taxes enough money to satisfy the demands of Zionists and communists, Zionists and communists have their agents in the US federal government borrow money by selling US federal government treasury bills and treasury notes.

As of 12/31/09 the main holders of US federal government treasury bills and treasury notes are:

(1) US Social Security and Medicare trust funds ($4.5 trillion)

(2) US investors ($3.5 trillion) composed of private investors (banks, corporations, private pension funds) and public investors (US states and pension funds for employees of US states)

(3) Foreign investors ($3.5 trillion), composed of private investors and public investors (mainly foreign central banks)

(4) US Federal Reserve banks ($0.8 trillion)

For fiscal 2009 interest payments to holders of US federal government treasury notes amounted to $383 billion (about 18.2% of US federal government receipts for 2009) including interest payments of $182 billion to Social Security and Medicare trust funds.

(Based on a projected interest rate of 6.2%) for fiscal 2014 interest payments to holders of US federal government treasury notes are projected to amount to $1.19 trillion (about 56% of projected US federal government receipts for 2014) including interest payments to Social Security and Medicare trust funds. 

(Based on a projected interest rate of 10.25%) for fiscal 2014 interest payments to holders of US federal government treasury notes are projected to amount to $1.968 trillion (about 91% of projected US federal government receipts for 2014) including interest payments to Social Security and Medicare trust funds.

If 56% of US federal government receipts are used to pay interest, there will not be enough money left to pay for military and social programs as they were in 2010.  The military will be lucky to get half of what they received in 2010, and the amount spent on social programs probably will be less than half of the 2010 amount.  Welfare recipients will be demanding higher taxes for those who work in order to restore welfare payments to previous levels, and those who work will be demanding tax decreases because of lower earnings resulting because of a big drop in US federal government spending in the US economy.

If 91% of US federal government receipts are used to pay interest, the US economic system probably will be in a state of collapse.  The military will be lucky to get one-quarter of what they received in 2010, and there will be little, if any, money to spend on social programs.  What little money is available for social programs may be needed for paying concentration camp guards at concentration camps for US citizens arrested because of grocery store looting and other criminal acts -- millions of US citizens cut off from social security payments and SSI payments.

The US federal government has failed to follow basic rules of good economic management.  (1) Good economic management means that a business earns what the business receives.  (2) Good economic management means that a business does not spend more than the business earns.  (3) Good economic management means that a business does not take money from others without permission.

(1) The US federal government earns only what is lawfully collected in taxes.  Money received by the US federal government because of borrowing is not earned.  (2) The US federal government should spend money lawfully collected as taxes.  It is not good economic management if the US federal government spends borrowed money.  (3) When the US federal government takes money from the US Social Security Trust Fund in exchange for US Treasury Notes, the US federal government is taking money from US citizens without permission.  US citizens want Social Security Trust Fund money to be invested wisely, such as in gold and silver so that later there will be enough funds for promised retirement payments.