Hike in interest rates to become major burden on national debt, budget deficit

For years, warnings that any increase in interest rates would severely affect the payments made on the national debt and budget deficit have been ignored by most Washington insiders. Many public officials, both Republican and Democrat, paid no attention to these warnings because either they felt interest rates wouldn’t increase or they didn’t want to tackle a difficult issue.

In April, Economic Collapse News reported that President Obama’s 2014 budget would lead to debt interest payments of $763 billion within one decade, but this figure did not include any jumps in interest rates.  If the interest rates were to inch higher between now and 2023 then interest payments could surpass the $1 trillion mark.

After Federal Reserve Chairman Ben Bernanke announced last week that the central bank would begin tapering off the quantitative easing program next year, the yield on the 10-year Treasury note increased to its highest level in more than a year at 2.63 percent – the 30-year bond yield is up at 3.63 percent and the five-year note yield is also up at 1.526 percent. This percentage is already higher than the Congressional Budget Office’s forecast for the present quarter and remainder of the year.

Steve Bell, senior director at the Bipartisan Policy Center and a former Republican Senate Budget Committee chief of staff, told Reuters that if the rate persistently climbs then this could very well mean interest costs could rise by hundreds of billions of dollars over the next 10 years, an action that has been spoken about since the days of President George W. Bush – and to a lesser extent President George H.W. Bush (Ross Perot).

“People who are not worrying about the impact of higher interest rates on the federal deficit are not in touch with reality,” Bell said. “One of the reasons we aren’t in worse shape than we are now is because interest rates are so abnormally low.”

The CBO March 202 baseline projections of interest costs for the year 2022 were $600 billion, but the concord plausible baseline projection is closer to $1 trillion. This means that the budget deficit will be unsustainable, especially since interest payments right now account for six percent of the budget.

David Walker, the former comptroller general of the Government Accountability Office (GAO), has been explaining since about 2005 and 2006 that the debt is so enormous that the interest payments will be one of the primary budget items. Meanwhile, the United States would only be able to afford some entitlement programs as well as the interest costs on the mammoth national debt.

Although the CBO projected that the budget deficit would dip to less than $700 billion, it is expected to exceed $1 trillion within the next few years, a signal that the budget isn’t being contained or tackled. The national debt currently stands at $16.88 trillion (at the time of this writing) and interest payments for 2013 have totaled roughly $9,000 per person.

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