For months there has been massive attention placed on Greece, Spain, and other EU nations with massive debt problems. These nations have placed burdens on Europe and the world, affecting stock markets as well as international politics. In the US, the fate of Greece and other nations has spurred debate on the potential problem of the US deficit and debt level.
The US is in trouble. The mere fact that America had its creditworthiness downgraded, and on credit watch for further downgrades, is testament to this fact. The current deficit for Fiscal Year 2012 was $1.3 trillion (according to usgovernmentdebt.us). That exceeded the total collection of income taxes for the year.
The federal debt for 2012 is $16.4 trillion which exceeds by more than 100% the 2010 US gross domestic product (GDP). Viewed another way, the US debt equals the annual (2010) GDP of the bottom 196 countries in the world combined (out of 210) plus an extra $200 billion to spare.
As enormous and worrisome as these figures are, there is an important factor that is not being figured into the projections of how to resolve the US problem. Interest.
Based on the Budget of the United States Government, current interest for 2012 is 1.37% with increases every year to 2017 and a rate of 2.65%. Thus $2.22 trillion will be added to the national debt in 5 years from interest alone.
But this assumes that the predicition of the economy are accurate, and they show a somewhat prosperous future. What we have not seen is what might happen once the Federal Reserve increases interest rates. Assuming every other factor occurs as predicted, which is unlikely, what happens next?
We adjusted the interest rate by 1% in each year from 2012 – 2017 [2.37%, 2.67, 3.01, 3.37, and 3.65 respective], and ran the numbers. We also ran the numbers at 4% increase (average after 1980′s) and exactly 6.24% (average since 1971) for each year. The figures were as follows:
Therefore even a modest increase in the interest rate results in a huge increase in national debt. Which says nothing of an increase along short-term or historic levels.
The important thing about all these figures is that in all the talk of slowing government spending (as presented by the Obama Administration, Democrats and Republicans) there is no consideration of the eventual increase of interest rates. A return to the 4% range is eventual and without question, while the historical rate is likely at some point in the future.
If a further downgrade of US creditworthiness were to occur, it is plausible that interest rates could increase by 2% overnight independent of any other factor. Other factors, like inflation or the value of the dollar, could also force an increase in the interest rate beyond Fed control. No matter the reason, interest rates will increase – sooner than later by all reasonable expectations.
Touting out-of-context spending figures (Reduced Government spending to the lowest level since Eisenhower) or announcing budget plans that slow the increase in spending (Ryan Budget) may win elections, but neither removes the problem facing the future of America.
Given the reality of the problem, and the austerity measures being placed on Greece as well as the potential impositions on Spain and other nations facing default, we ask ALL politicians why real solutions to the growing problem are not being presented to the public?
In time, interest will be beyond the reach of intervention. That time, a return to even close to historic interest levels, is nearer than politicians will admit – in our opinion. Without action, immediately, to curtail not only new Government spending but total spending a vortex of economic woes lies on the horizon. Whether we talk about it or not.