The Real Problem: Interest

The Register Guard (Eugene, OR), September 30, 2013 | Go to article overview

The Real Problem: Interest


Byline: The Register-Guard

As Congress wrestles over whether to raise the nation's debt ceiling, a more important issue is sure to be ignored. What really matters is not how much money the government borrows, but how much the borrowed money costs. Seen in this light, the biggest threat comes not from continued, though shrinking, federal deficits, but from the prospect of having to pay higher interest rates on the accumulated debt.

The United States has run up a lot of debt in the past five years. The Great Recession slowed the flow of tax revenues, while spending on tax cuts, wars and stimulus programs continued or climbed. As a percentage of the gross domestic product, debt held by the public - as opposed to money that one part of the government owes another - rose to 62 percent in 2010 from 36 percent in 2007.

Yet the cost of carrying that debt - the interest paid on Treasury notes sold to finance deficit spending - actually declined during that period. In 2007, according to the Congressional Budget Office, net interest outlays amounted to 1.7 percent of GDP. The interest burden was only 1.3 percent of GDP in 2009, climbing to 1.4 percent in 2010. The United States owed more, but the larger burden was easier to carry.

Low interest rates are the reason. Interest rates on 10-year Treasury bills have dipped below 3 percent, allowing the United States to finance a growing debt at bargain prices. In the late 1980s, when interest rates peaked above 14 percent, interest on the national debt amounted to 4 percent of GDP, more than double the current load.

But rates aren't likely to remain at current low levels - indeed, they've already climbed modestly. The CBO projects that the rate on the 10-year Treasury note will rise to 5 percent by 2020. …

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