US Government Debt Going Out Of Control

US government debt
Published: October 21 2009 09:26 Last updated: October 21 2009 09:54
In the minute or so it takes to read this note the US Treasury will have paid out $1m in gross interest on the federal debt. That sounds like a lot, but it is less of a burden than it has been in past years in relative terms. Net interest has more than halved as a percentage of federal spending compared to 1988 to about 6 per cent this fiscal year.
Do not uncork the bubbly yet. The low figure is an aberration caused by a bloated deficit combined with unusually low Treasury yields, particularly on the short-end. This has been exaggerated further by more issuance of shorter maturities, bringing the average tenure down to 48 months recently from the 60-70 typical in previous decades.
EDITOR’S CHOICE
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Assuming rates normalise, the share of government spending taken up by net debt payments will nearly triple in a decade and the dollar figure will nearly quadruple. This would still put net interest as a share of spending at a level similar to 1980, but the rest of the budget will look very different. In 1980, nosebleed interest rates were about to go on a three decade slide and the oldest baby boomers were just 34 years old. By 2019, spending for their pensions and medical care plus interest on the debt will only leave 20 per cent of the federal budget for other purposes according to the Government Accountability Office. A decade later they will consume every dollar.
Such sobering calculations underline how urgent it is to tackle entitlement reform – something sadly lacking in current healthcare legislation – and to consider fiscal austerity while it is still possible. The saying that those who do not understand compound interest are most likely to pay it surely applies to Washington.