The Treasury released its Monthly Treasury Statement. There is a lot of interesting information in there, but what caught my eye was the interest-on-the-debt number. It should open our eyes to the impact of large increases in deficit spending and rising interest rates.
For perspective, interest payments in January were $34 billion, close to half of what Treasury paid in August. Another way of appreciating the size of August’s interest payments is to annualize the figure: $756 billion is 3 percent of GDP. Furthermore, interest rates are still going up, so it will likely get worse before it gets better. FYI: Half of our debt has a maturity of 3 years or less, and 3-year treasury notes are currently yielding 3.74 percent — up from 0.4 percent a year ago.
Incidentally: The Manhattan Institute’s Brian Riedl published a timely paper last year that could have been called “Everything you need to know about interest rates and interest payments, and why legislators should worry more than they are.” This paper is important, and I hope you will read it.
The summary:
Today’s trendy economic argument asserts that the current debt-to-GDP ratio of 100% has not harmed the economy, and therefore Congress can easily afford large new government expansions. But that argument has two fatal flaws. First, it fails to acknowledge that over the next few decades—even without new legislation—the debt is already projected to reach levels that even debt doves would likely consider unsustainable. Second, this argument assumes that interest rates will forever remain near today’s low levels, thus minimizing Washington’s cost of servicing this debt. However, economic trends rarely remain linear indefinitely, and interest-rate movements have rarely followed forecaster projections. Indeed, several realistic economic scenarios could easily push interest rates back up to 4%–5% within a few decades—which would coincide with a projected debt surge to greatly increase federal budget interest costs. Debt doves have no backup plan for this possibility. Policymakers should now enact reforms that scale back the escalating long-term debt projections in order to limit the federal government’s risk exposure to a fiscal crisis.