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To borrow a phrase from the Clinton campaign - it's the debt, stupid!
In FY 2010, we paid $413,954,825,362.17 just in interest on the national debt.
So far in FY 2011, we've paid $412,517,504,466.06. And there are still two months to go.
Government - Interest Expense on the Debt Outstanding
This is the ticking time bomb in the corner that nobody wants to talk about. Why is it a ticking time bomb?
Because interest rates are currently extremely low. As of July 1, 2011, 3 month Treasury Bills are paying 0.04% interest. We haven't seen interest rates this low for over 50 years.
So what happens when interest rates go up....
You might hope to keep your insurance plan, your doctor, your premium, and your deductible, but Obamacare is going to change all of that for you.
Fed: Rates likely to stay near zero into 2013 - USATODAY.com
Fed Likely To Keep Interest Rates Low 2 More Years : NPR
Well, it seems we have a series of opposing forces going on here.
In no particular order, we have clear indication that interest rates are going to stay low for at least the next two years as there is no rush to bring dollars back in. Thus no real rush to deal with the long term effects of over used debt monitization. It also appears QE3 is a question mark yet even with QE1 and QE2 passing, no one has yet to deal with all the toxic assets still sitting on the books in the financial sector. All that debt, both toxic and otherwise, is still around. On a consumer level, you have more incentive to go into long term debt and less incentive to save money off investing in typical cyclic return investments (like CDs and interest accounts) for years to come. Basically a weak set up, encourage debt and discourage savings as banks do not want your cash. That has some market effects as we already know that corporate holdings are still way oversold, real estate holdings are still looking for a floor, and there is still high investment interest in safety from treasuries (even with a partial downgrade) and hedge bet metals.
What does all this mean to government debt?
It means there is still plenty of incentive to borrow (a politican's wet dream) just as it is for everyone else as there is still low cost in doing so. We are adding historic levels of debt with incredibly low costs of borrowing, it would be dishonest to suggest there is no link. Similar to board members of a company or Congress voting in their own raises, there is little incentive right now on the Federal level to do much else or cause much else that would in effect raise the cost of borrowing money. At least in a manner causing even more budget headaches than the low rates are causing now. All one needs to do is view any auction of bonds and see the cost of borrowing is still very low for the government. The realized effect of an S&P downgrade, or a higher cost for the US to borrow money, did not really happen as there is not consensus among the credit agencies as to what our rating and outlook should be. And, again, everyone rushed to treasuries anyway telling the government to continue "borrowing away" all during the sell off period the S&P downgrade fell into.
For now, interest rates the US faces will probably hold for a while as there seems to be little overwhelming one direction indications calling for the cost of borrowing to increase (for anyone for that matter.) The real way to look at this is similar to what you suggest. We should worry about the amount of debt we have right now, or simply that we have to borrow north of $0.40 of every dollar spent going forward. But, the overall burden of our debt will be realized the moment there is enough effect to increase the cost of borrowing. The obvious conclusion is to deal with our debt now while costs are low vs. waiting for the costs of borrowing to increase. Too bad our politicians only see, low cost to borrow means doing so. "Kick the can down the road."
- Frustrated Independent
"They who can give up essential liberty to obtain a little temporary safety, deserve neither liberty nor safety." - Benjamin Franklin
"Every time something really bad happens, people cry out for safety, and the government answers by taking rights away from good people.” - Penn Jillette amazingly enough, and I agree.