With the Fiscal Cliff situation looming for the USA toward the end of year 2012, I have been doing a little research on the subject for a white paper project. This led me to come across an interesting site called the National Priorities Project (nationalpriorities.org) which is an excellent interactive site about the Federal government’s spending and revenues. The site is a real eye-opener for those of us who wonder where all that money goes that our government spends.
One thing that catches my eyes is that interest on our national debt is our fourth largest expense item at 6.76% of the projected 2013 Obama budget. When one considers that the US Treasury is paying out the lowest interest rates in 60 years, this should be raising some concerns as to what we will do when the day comes that interest rates return to their historical averages–or worse! For example, the 10 year Treasury Note now pays out at about 1.65% interest…but historically, over the last 50 years, I would say the going interest rate for this note was around 4% to 6%. If one assumes an average of 5% for the 10 year, and perhaps 2% or so for the 1 year notes (which now pay about 0.3%), then interest rates would triple or more from where they are currently.
Does this mean that the cost to service our debt could triple if interest rates return to their historical norms? Well, I guess the answer is, “it depends.” For example, some debt is probably long term debt at a fixed rate of interest and may not fluctuate much.
Yet, even if we assume there are some long term fixed payouts in our national debt, even a doubling of the payouts could push US interest debt on our Treasuries to around 13% or more of our total annual government budget and leaving it closer to the annual cost of our military’s overall budget. Also, one would have to assume that if interest rate debt is consuming a larger part of the annual outlays, then the percentage of some other expenses such as the military could suffer cutbacks.
The prospect of a large increase in the service of our national debt should clash with fiscal austerity as many people are pushing for smaller deficits in 2013 and beyond. We cannot continue to roll over our interest payments or re-structure then forever without coming face to face with some tough decisions. At such point, would the Federal Reserve defer to just printing more money (like Quantitative Easing) just to ease the pain and circulate enough money to pay down the debts? If so, imagine what that might do to the value of the US dollar? Or to future interest rates, especially if the major ratings agencies should lower the US’s high ratings.
A significant drop in the US’s ability to re-pay its debts would only cause more money printing, I fear. Or do we just walk away from our national debt at some point? Good luck with that, because it would crush the value of the American dollar and cause great pain to the American people!
Ultimately, I do believe that the Fed and most other central banks plan to print–and print!– more money to try to monetize our way out of the sovereign debt fix that so many countries are now involved with –but they will only do that after they see that other programs just aren’t doing much good. When their backs are against the wall, the world’s central banks, led by our own Fed, will choose the easy way out–print more money!–even if it should bring on a large dose of inflation. The Fed and most central bank leaders fear deflation more than they fear inflation. Inflation is like a hidden tax–most people don’t see its effects day to day but only notice it over time. Deflation is easily seen right away in fewer jobs, depressed wages, lack of growth, and of course lower prices which few can appreciate since they aren’t earning much money! Given the fears of deflation, most central bankers realized that inflation is an easier animal to deal with in keeping the masses satiated enough not to throw our government leaders out of office. However, that’s a subject for another day.
All in all, this site offers a lot of interesting interactive displays on the Federal Budget. I don’t know much about the supporters of the site–it seems to be formed by some independent-minded intellectuals looking to better educate Americans on what goes on in Washington. I suppose some would say this is a “commie liberal” site but I try to remain objective, and what I see here is pretty much not politically motivated–just the hard facts. But even if a reader is suspicious of the site by its intellectual tone (which I know some people affiliate with liberalism) of the site, I still think everyone should keep an open mind and evaluate the data that is here objectively, whether or not one agrees with “the tone” or message of the site operators.