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US Debt Servicing Payments Go Vertical

by Rachel MillsApril 22, 2024

Image from Visual Capitalist

What could possibly go wrong?

In 2023, America’s debt service expenses surpassed the $1 trillion mark, marking a growth of more than double over the past decade. Additionally, according to projections by the Congressional Budget Office, the United States is anticipated to allocate more funds towards servicing its debt than on defense spending in 2024, a first in history. This escalation in interest costs is driven by a combination of elevated interest rates and a record $34 trillion in government debt, potentially straining government expenditures.

Over the next decade, the U.S. government is forecasted to allocate a staggering $12.4 trillion towards interest payments alone, equating to approximately $37,100 per American. To put this into perspective, we now spend more towards servicing the debt than we do on Medicaid.

The Effect of Interest Rates on Our Government's Fiscal Health

It's not just spending and adding to the debt that causes the problem. High interest rates exacerbate the issue greatly. And, it sounds like they may not come down any time soon.

Interest rates do more than make mortgages and other debt less affordable for you. They also have a direct impact on the US government’s debt payments, primarily through the cost of servicing its outstanding debt obligations. Here’s how interest rates influence the government’s debt payments:

Cost of Borrowing: When interest rates rise, the cost of borrowing for the government increases. The US government issues Treasury securities to finance its spending and deficit, and these securities have fixed interest rates. As interest rates climb, the government must pay higher interest on newly issued bonds, notes, and bills. This elevated cost of borrowing adds to the government’s debt burden, increasing its debt service payments.

Existing Debt Obligations: Higher interest rates also affect the government’s existing debt obligations. The US government has a substantial amount of outstanding debt in the form of Treasury securities with varying maturities. When interest rates rise, the government must pay higher interest on its existing debt as these securities come due for refinancing or redemption. This leads to higher interest payments on outstanding debt, further adding to the government’s debt servicing costs.

Budgetary Impact: Increased debt servicing costs due to higher interest rates can strain the government’s budgetary resources. A larger portion of the federal budget must be allocated towards paying interest on the national debt, potentially crowding out spending on other priorities such as infrastructure, education, or healthcare. This can present challenges for fiscal policymakers in managing the budget deficit and addressing competing spending priorities.

Debt Sustainability: Persistently high interest rates can exacerbate concerns about the sustainability of the government’s debt burden. If interest payments consume a significant portion of government revenues, it may become increasingly difficult to manage the debt without resorting to measures such as tax hikes, spending cuts, or further borrowing. This could undermine confidence in the government’s ability to meet its debt obligations, potentially leading to higher borrowing costs and further fiscal challenges. Anyone who relies on government checks, like social security benefits, should pay attention. As the debt mounts up and the servicing gets more and more expensive, the obvious solution for the government is usually more money printing. Of course, that tends to be inflationary.

Guess what else is going vertical right along with debt?

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