Rising Interest Rates: A Sobering Outlook on Federal Debt Payments
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Standard & Poor's Throws the First Volley at the Record U.S. Deficit Cutting the Rating Outlook to Negative (but still maintaining the AAA Rating). Stock Futures Drop 167 Points
The act this morning by S&P will accelerate the increase in interest rates for all loans in the U.S. and will significantly increase the annual interest charge on the Federal Debt.
Increasing rates will mute both the recovery in the economy and real estate markets.
The graph below shows the Congressional Budget Office’s (CBO) forecast and history on total interest payments for the U.S. debt. Key is that the forecast assumes there is no increase in interest rates and that we will have no new Federal spending programs not already in the budget.
One year Treasury-Bills averaged 0.318 percent in 2010, while the two-year Treasury Note averaged 0.703 percent.
What this says is that if the two-year Treasury note yield increased to 2.2 percent (the anticipated cost of inflation this year), then expected interest expense on the debt triples to more than three trillion dollars in 2020.
Interest rates are increasing—it’s just a matter of when.