http://money.cnn.com/2009/11/19/news/economy/debt_interest/index.htm $4.8 trillion - Interest on U.S. debt Unless lawmakers make big changes, the interest Americans will have to pay to keep the country running over the next decade will reach unheard of levels. By Jeanne Sahadi, CNNMoney.com senior writer Last Updated: November 19, 2009: 1:05 PM ET NEW YORK (CNNMoney.com) -- Here's a new way to think about the U.S. government's epic borrowing: More than half of the $9 trillion in debt that Uncle Sam is expected to build up over the next decade will be interest. More than half. In fact, $4.8 trillion. If that's hard to grasp, here's another way to look at why that's a problem. In 2015 alone, the estimated interest due - $533 billion - is equal to a third of the federal income taxes expected to be paid that year, said Charles Konigsberg, chief budget counsel of the Concord Coalition, a deficit watchdog group. On the bright side - such as it is - the record levels of debt issued lately have paid for stimulus and other rescue programs that prevented the economy from falling off a cliff. And the money was borrowed at very low rates. But accumulating any more interest on what the United States owes at this point is like extreme sport: dangerous. All the more so because interest rates will rise when private sector borrowers return to the debt market and compete with the government for capital. At that point, the country's interest payments could jack up very fast. "When interest rates rise even a small amount, the interest payments go up a lot because of the size of the debt," Konigsberg said. The Congressional Budget Office, which made the $4.8 trillion forecast, already baked some increase in rates into the cake. But there is always a chance those estimates may prove too conservative. And then it's Vicious Circle 101 - well known to anyone who has gotten too into hock with Visa and MasterCard. The country depends heavily on borrowing to fund what it wants to do. But the more debt it racks up, the more likely it becomes that creditors could demand a higher interest rate for making new loans to the government. Higher rates in turn make it harder to pay off the underlying debt because more and more money is going to pay off interest - money, by the way, which is also borrowed. And as more money goes to interest, creditors may become concerned that the country can't pay down its principal and lawmakers will have less to fund all the things government is supposed to do. "[P]olicymakers would be less able to pay for other national spending priorities and would have less flexibility to deal with unexpected developments (such as a war or recession). Moreover, rising interest costs would make the economy more vulnerable to a meltdown in financial markets," the CBO wrote in its most recent long-term budget outlook. So far, that crisis of confidence hasn't happened. And no one can predict with any certainty whether or when it could occur. But should it occur, the change could be abrupt. That's because the government frequently rolls over - or refinances - the debt it has issued as it comes due. In other words, when a Treasury bond or note matures, the government must pay the investor the face value on that debt. In order to do that, the Treasury borrows money to pay back the investor, which means the debt would be refinanced at whatever the going interest rates are at the time. Just how much churn is there? Of late, a fair bit it seems. A Treasury borrowing advisory committee reported in early November that "approximately 40 percent of the debt will need to be refinanced in less than one year." Since rates may well stay low over the next year, it's possible that debt could be refinanced at the same or even lower rates. But that situation won't last forever. So what will Washington do? To help mitigate the potential risk of rising rates, the Treasury has said it would start increasing the average maturity of the new debt it issues. That way the debt it refinances in the next couple of years will be locked in at lower rates for longer periods of time. And the Obama administration has promised to produce a deficit-reduction plan that would aim to bring down annual deficits to roughly 3% of GDP over the next several years, below the 4% to 5% currently projected. 0:00 /1:34Uncle Sam's got his hand out If that happens, the $4.8 trillion in interest payments that CBO estimates for the next decade could go down if interest rates don't increase as much as CBO expects. "There will be less debt outstanding than if we don't get the deficit down. It may also reduce [the average interest rate on the debt] since less debt means less pressure on interest rates," said William Gale, co-director of the Tax Policy Center. But whether they can do that within a few years of an economic recovery is another matter. "Even under the president's [2010] budget as evaluated by the CBO we do not get anywhere close to that," Gale said. That could mean the president's 2011 budget proposals would have to make a lot of changes to get closer to the 3% goal. Unpopular changes like tax hikes and spending cuts. Budget hawks hope the president will push for a deficit-reduction commission to come up with ways to cut the deficit and then propose legislation that lawmakers would only be able to vote for or against. The reason: There is no political will to make the tough calls. Especially in a mid-term election year.
What happens if this economic slow down continues and the US consumer doesn't make a roaring come back? Where will the Chinese and Japanese who have long been used to huge USD trade surpluses get the USD with which to keep buying US treasuries? My guess is that when Obama went over to Asia they told him some hard truths and told him that Americans need to stop being delusional about their debt problem because crunch time is near. Those who think that the US can just devalue their way out of the debt are also deluding themselves, politically it is a non starter which AARP (people on fixed incomes) getting more powerful by the day and economically it would be a disaster with input costs soaring. We will be taking our medicine at some point, better sooner rather than later.
TIPS continue to rise in price as a decline in their real yield to maturity, as demand for their inflation protection increases. This has been the salient feature of the bond market since the beginning of last month: real yields have declined across the board, and they have declined relative to nominal yields of comparable maturity. --Scott Grannis-- The TIPS markets is starting to get a whiff of inevitable inflation.
Indeed. America is very close to the Death Spiral. Any currency or bond sell-off translates to jacked rates (Depression and Crash), or huge inflation via monetization (and then a Depressionary Crash from wage-attrition). The later is favored. Monetization forgoes a tripling of debt service payments. Half our debt is financed short-term. Like a shitty Wallstreet Investment Bank levered to the tits. Overnight lending gets pulled, and we're done. So they'll monetize. Push the Greatest Depression to a later date, trash wages, and settle for a 2nd World Banana Republic. It doesn't help that our own economic stewards are calling for the end of reserve status and our largest trading partners are openly plotting to kill the Dollar. It also doesn't help Globalists openly propose America resign her sovereignty so "Global Governance" can emerge. Many of those internationalists/CFR scum populate the highest ranks in Washington, the White House, State Department and Treasury. Don't kid yourselves. This is hardcore, full-on, Economic Warfare. And we're in the top of 9th. Very late in the Game. The sun is setting for our City on the Hill, Gentlemen.
Ron Paul suspects the FED lends money to foreign Central Banks to buy the US Treasury market. Makes sense. Also makes sense why the FED has pounded the table against disclosure and certain collapse, if not. They've been playing games with equities and bonds to preserve the illusion of "CONFIDENCE".
Achilles, You have a great pen and an even greater talent for putting the finger on the wound without falling into the trap of cheap shots. Cheers.
So....the plot thickens.... So what is the name for .... 1) Monetizing domestically.... and 2) Monetizing internationally.... Gives the appearance for foreign demand for US Debt .... But in short....just paying for debt with freshly printed money.... .......................................................... ie A person wants to buy a home but does not have a job.....ie a source of funds....from "real work"....surrounding a going concern.... So....no problem....one just prints what is needed and then some.... In fact why not a much bigger house at that ? Why not ?
Thanks. A year ago, I was railing and cursing these bastards up and down. Realized the hostility only takes away from the point. So I toned down. We're in serious trouble. I estimate 3-5 years, max.
...................................... The question being..... Which currency is going to be the one that loses the least.... The battle of the fiats...."is on"....
China, the Asian Tigers, Canada, Brazil. I think. China because they're number#2 with a huge, untapped consumer debt market (massive private savings to draw from), and artificially suppressed Yuan. Canada/Brazil are commodity-backed. Asian-tigers, same as China, but less so. Japan has gone down the road of pinko-banking, but don't know enough to be sure. Russia has commodities but still unproven with capitalism and their sham mafia-style democracy that nationalizes oligarchs. India, possibly. Don't know enough. Europe,....? Yuan looks good.