The Most Important Thing You Need to Know About our Nation’s Out-of-Control Debt

With each passing week, there is a little more progress in Washington as a bi-partisan group of legislators seeks to find a middle ground solution to our fiscal morass. Just this week, Senator Chuck Schumer (D-NY) and Peter Peterson, a retired billionaire who is spending a chunk of his fortune on raising awareness of the budget deficit, have expressed support.

But things are moving way too slowly. With each passing day, we’re moving into a deeper fiscal hole that will take even longer to unwind. One metric in particular needs to be looked at, and once you understand its corrosive impact, you might be inclined to understand the need for a solution that exacts sacrifices from all sides. Simply digging in on one side or the other of this tax-and-spend debate will only make the pain worse down the road.

That metric: interest expense.

Ever sit in a taxi at a red light and watch the taxi meter keep spinning higher? Well, imagine if that taxi meter were spinning really fast. That’s what could soon be happening to the interest on our national debt.

Here’s an alarming stat: our national debt rises by another $1 million every 18 seconds. Right now, Uncle Sam is the lucky beneficiary of low interest rates, so we’re “merely” incurring about $30,000 in interest expense every 18 seconds. Yet, piling on $1 million every 18 seconds has surely taken its toll. We’re now up to $14.3 trillion in federal debt — and counting (net debt is just below $10 trillion after accounting for surpluses in Social Security and other trust funds).

Source: U.S. Treasury

A quick look at the chart above makes you think things aren’t so bad. After all, the government’s interest payments on the debt have fallen in the past few years. But that’s simply the result of a plunge in interest rates in 2008 and 2009, which allowed the government to pay off higher-rate debt and issue lower-rate debt. In 2006, Uncle Sam paid an average of 5.0% interest on its debt. That figure fell to 3.9% by the end of 2008 and currently stands at 2.9%. Had interest rates not plunged, the annual interest-rate tab would now approach $550 billion a year.

Now, there’s a double-whammy headed our way. First, the government chose to focus much of its new debt issues on bonds with short durations and some of that 2008 debt is already being rolled over. With interest rates still low, that’s no problem right now. But what happens when rates rise and Uncle Sam needs to roll over that debt?

Well, the chart again starts to move on the trajectory it was on from 2004 to 2008. A 200 basis-point rise in interest rates adds about $180 billion to annual interest costs (assuming all of the debt gets rolled over). A 400 basis-point rise in rates would push our annual interest costs to nearly $800 billion (again assuming that all debt was rolled over — the real impact will be muted by any 5 and 10-year bonds the government can simply sit on for a while longer, though those bills will eventually come due as well).

That’s the first whammy. The second whammy is the spinning taxi meter scenario I mentioned; as yet more debt is piled on the existing load. The non-partisan Congressional Budget Office (CBO) just issued a fresh assessment: “Federal budget deficits will total $7 trillion over the next decade if current laws remain unchanged.” By my math, that pushes the total debt tally north of $20 trillion. If you assume Uncle Sam will eventually need to pay 5% rates on its debt issuance, then we’re talking about $1 trillion interest payments down the road. To unwind from that fiscal mess would take even higher tax increases and deeper spending cuts than even the most radical partisans could foresee right now.

That’s why this is a crisis that is just beginning.

Action to Take –> Washington needs to take serious action right now. We’re heading into an election next year and politicians will likely show little real courage once the campaign season gets underway. By waiting until 2013, the math cited above really starts to hurt, especially because interest rates could be moving higher by then. (If rates are still low in 2013, then it means the U.S. economy remains weak and deficits will be hard to close simply due to low levels of economic activity.)

None of us wants to pay more taxes. None of us wants to see benefits cut that are owed to us. It has become a mantra that the sacrifice starts with everyone else, not me. Yet that’s gotta change. We have a collective choice to make unpleasant compromises now, or face disastrous consequences down the road. Let your voice be heard. If your representatives in Washington truly grasp your concerns about this runaway freight train, they may actually show some courage of their own.

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