A $1 Trillion A Year Deficit Interest Rate Payment

Since the government has left itself no room to maneuver because of its massive commitment to spending, the focus will become what the carrying costs of the debt will be. The Congressional Budget Office predicts that the interest payments on government debt this year will be $172 billion in 2010 and will rise to $806 billion in 2019. Those forecasts are optimistic. If the economy has a sluggish recovery, GDP will not rise at anywhere close to the rate of interest coverage, leaving the burden of government debt at a level which will be both unimaginable and unsustainable. Interest due on the debt could easily be $1 trillion toward the end of the next decade.

Most of the conversation about American borrowing has focused on whether the Chinese and other large buyers of Treasuries will continue to have an appetite for US paper. Very soon the focus of the debate will move to whether the government will find that it does not have the ability to cover the service on the outstanding debt balance.

The possibility of a default on US paper was raised publicly when S&P made negative comments about the balance sheet of the UK. Another ratings agency, Moody’s, said its confidence in the quality of Treasuries had not changed even with the rising US deficit. That leaves people looking at the Moody’s opinion to deduce that the ratings agency sees either a surge in US GDP over the next three or four years or a super-normal capacity of individual and corporate taxpayers to take on a growing burden.

In reality, the future of the deficit and the interest due on it to come down to two things which would have to happen almost simultaneously. The tax burden in America would have to be raised and the economy would have to return to a period of 4% GDP growth. One without the other would not be adequate given the size of the hole that must be filed.
The capacity of the US  to shoulder a tax burden, the likes of which it has never seen, and simultaneously create a rapid and sharp reversal in falling GDP put the government back into the role of the poker player who is “all in.” If the economic stimulus package is not having phenomenal success before the end of the year, the federal government will not have any options other than to learn to live with a budget much smaller than the one it envisions now.

Douglas A. McIntyre