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.


  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.

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