The Fiscal Yahoo Caucus of the United States Congress is ready to reach into your family wallet and grab cash. Need to buy or refinance a house? Ca-ching. Owe anything on credit cards, perhaps a revolving business loan, or need student loans? Ca-ching. Ca-ching. Ca-ching.
This nonsense -- a refusal to raise the federal debt limit without all sorts of conditions -- matters to everyone because we as Americans borrow money at extraordinary low rates. We borrow a lot of money, actually, so even a small increase in interest rates could really hurt.
The General Accountability Office says: “Spending on net interest as a percentage of federal spending has fluctuated over time, peaking in the late 1940s and in the mid 1990s. In the past, interest payments contributed to deficits and helped fuel a rising debt burden. Rising debt, in turn, raised interest costs in the budget, and the federal government increased debt held by the public to finance these interest payments. This has been called the ‘vicious cycle.’ Today’s relatively lower interest rates have lessened the pressure debt service places on the budget, despite the recent increase in the debt held by the public.”
We have a good deal. Interest payments as a percentage of the total economy were at 14.6 percent in 1948; today that number is only 6.4 percent.
So what if interest payments were that high again? The wheels of government come off.
Remember that government debt is financed in public markets. That debt is sold at auction, so someone has to be a “buyer” of bonds. “Consequently, the amount that the federal government spends for interest on its debt is directly tied to those interest rates,” the GAO said. “Under CBO's January 2012 baseline budget projections, debt held by the public would be 62 percent of GDP in 2022 and spending on net interest would rise from $227 billion in 2011 to $624 billion (or 2.5 percent of GDP) in 2022. CBO has assessed how changes in interest rates can affect federal spending. CBO notes that if interest rates are 1 percent higher than the rates assumed in CBO’s baseline budget projections, the government’s higher interest costs would add nearly $1 trillion to the cumulative budget deficit over the 10-year period.” (more…)