Monday, June 24, 2013

What Climbing Interest Rates Will Mean for the Budget Deficit

In fiscal year 2014, the federal government expects to spend around $3.8 trillion, with 6% of that being interest payments. But what if interest rates continue to climb? The current expected interest payments could skyrocket well beyond the  $228 billion forecast.



The CBO announced May 14 that the budget deficit this fiscal year (2013) will be $642 billion, or 4 percent of gross domestic product. Skyrocketing interest rates could result in a huge jump in the 2014 fiscal year deficit, perhaps hundreds of billions of dollars. And then interest will have to be paid on the increased deficit, it will be a vicious cycle, at some point it will become unsustainable.

We are fast approaching the end game.


3 comments:

  1. Both of these estimates look extremely optimistic to me. If we assume for the sake of argument that they ring up deficits of $1 trillion per year until 2022, that leaves us with a debt of $25 trillion. If the 10Y reverted to the mean (forget about overshooting to compensate for decades of reckless fiscal and monetary policies), that would result in debt service of $1.5 trillion.

    But I don't think we have another 8 years of more of the same. I think we either have a dollar crisis or a complete overhaul of the system well before then. To suggest that this situation can be maintained for another decade is wishful thinking.

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  2. There appears one solution: default. The next president is going to have to do it.

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