Massive U.S. Debt ($57k+ a Person) Will Force Interest Rates Higher

Interest rates will riseThis week, the “official” U.S. national debt hit $18.12 trillion. That’s a debt of about $57,000 for each American citizen, regardless if you are a child, adult, or senior! And factors like defaulting student debt and higher interest payments will only push our debt much higher.

Consider this: at the turn of the century (in 2000), the U.S. national debt stood at $5.7 trillion. (Source: Treasury Direct, last accessed February 20, 2015.) The U.S. national debt has increased by more than 217% in 15 years, or 14% on average per year. If this rate remains the same, we will hit my projected “official” national debt estimate of $34.0 trillion even earlier than I had originally predicted.

Higher Debt Eventually Leads to Higher Interest Payments

Digging deeper into my worries, the U.S. government continues to spend without any remorse. For the first four months of the government’s fiscal year, which began on October 1, 2014, the budget deficit has amounted to $194 billion. (Source: Department of the Treasury, last accessed February 20, 2015.) At this rate, we’ll pile on another $600 billion in debt this year…if everything goes well and we don’t encounter any hiccups like a war, a natural disaster, higher interest rates, or the admission the government has to bite the bullet on billions in defaulted student loans.

This fiscal year, the U.S. government is expected to pay almost half a trillion dollars in interest payments. But isn’t the Federal Reserve saying it expects to raise interest rates this year?


Student Debt in Trouble Territory

Over the past few years, the U.S. government has become an active player in the student loan market, even forcing some major financial institutions out of that market. However, delinquencies on student loans are rising sharply, which means the U.S. government may be forced to write off some of these loans, thus impacting the overall national debt figures.

In the fourth quarter of 2014, 11.32% of $1.16 trillion in student loans were 90 days or more delinquent. This rate has been increasing since 2012. In the first quarter of 2012, 8.69% of student loans were delinquent. (Source: Federal Reserve Bank of New York, last accessed February 20, 2015.) We’ve experienced an increase of 30% in the delinquency rate in student loans in just two years. I call student debt America’s “trillion-dollar ticking time bomb.”

Is the U.S. the Next Greece?

Earlier in this story, I referred to $18.12 trillion being the current “official” debt figure. I made a point of saying “official” because the government’s numbers don’t include future obligations, like social security payments or the debt of state or local governments. When you throw in all the obligations the government has, I’ve seen reports posting our real debt at between $100 and $200 trillion.

At the peak of World War II, our “official” national debt-to-gross domestic product (GDP) ratio hit 120%. If things keep going the way they are (slow GDP growth, but accelerated debt growth), we will hit the 120% debt-to-GDP ratio in the next few years without fighting a war!

We have incurred too much debt, and no matter how you look at it, it’s not sustainable in the long run. Have we learned anything from Greece’s failure? Greece incurred an immense amount of debt while its government spent without remorse. Now Greece is on the cusp of losing its membership in the eurozone and still can’t pay its debts.

The U.S. is no Greece. And maybe it’s not fair to make the comparison. But the fact is that the U.S. has more national debt (when looking at the nominal value) than any other country in the world. Sooner or later (or sooner than later), won’t our creditors be asking for their money back? We have already seen China and Japan reducing their exposure to U.S. debt.

So as our debt situation gets bigger, who will buy the Treasury Bills the U.S. government needs to issue to finance its debt? If it’s not China or Japan buying the debt, will the U.S. force pension funds to buy our debt or will the Federal Reserve go back into the money printing business to buy the debt?

Either way, over the next five years, the debt situation in the U.S. could become a major stumbling block to growth and a catalyst for sharply higher interest rates…something this generation of low-interest-rate millennials has never seen.