Looking at the monthly budget statement from the Department of the Treasury, in fiscal 2013, year-to-date (that’s October 2013 to this April), the U.S. government has already paid interest of $227 billion on its national debt. For the entire fiscal year 2013, the government expects to pay a little more than $420 billion in interest payments. (Source: U.S. Department of the Treasury, Financial Management Service, May 10, 2013.)
If I calculate the amount of interest payments relative to the national debt outstanding, which is around $17.0 trillion, the U.S. government is paying interest on the national debt at the rate of about 2.5%.
Now, look at these two scenarios…
If we assume that the U.S. national debt will be $23.0 trillion by 2023, then the interest payments on the debt will rise to about $575 billion, not taking interest rate changes into account.
If in 10 years from now, interest rates go back to historical levels and double to five percent, interest payments on the national debt will exceed $1.0 trillion per annum. 2023 is 10 years from now. You can be assured the economic environment will be very different one decade out from today.
But as I wrote the other day, according to the action in the 30-year Treasury market, interest rates may already be on their way up.
Since their peak in July of 2012, the 30-year U.S. bonds have declined in value—they are down almost six percent. Trading above $153.00 in mid-2012, 30-year U.S. bonds now hover around $144.00.
Take a look at the chart of 30-year U.S. Treasury bond prices below:
Chart courtesy of www.StockCharts.com
As we can clearly see from the chart, prices on U.S. bonds are falling, which means interest rates are rising. (I am watching the bond market very closely as the recent decline in bond prices is significant.)
Bonds are signaling higher interest rates ahead, something very few economists are talking about. Hence, even if the government cuts back on spending and/or brings more receipts in, the eventual increase in interest rates will offset any short-term reduction in the budget deficit.
In other words, any way you look at it, the national debt will keep rising. Once it reaches the point at which interest costs on the national debt hit $1.0 trillion, there will only be 15 countries in the world whose annual gross domestic product (GDP) is greater than our annual debt interest payments.
What He Said:
“Starting two years ago I was writing how the housing boom would go bust and cause the U.S. economy to suffer sharply. That’s exactly what is happening today. From what I see happening in the U.S. economy, I’m keeping with the prediction I made earlier this year: By late 2007/early 2008, the U.S. will be in a homemade recession. Hence, I expect housing prices to continue declining, soft auto sales, soft consumer spending and a lower stock market.” Michael Lombardi in Profit Confidential, August 15, 2007. You would have been hard-pressed to find another analyst predicting a U.S. recession in the summer of 2007. At the time, the stock market was roaring, with the Dow Jones Industrial Average hitting its all-time high of 14,164 in October of 2007.