A professor of Finance at the Wharton School of the University of Pennsylvania warned that the interest rate on the federal debt could top 7% soon. The current trend, using just that share of debt that is held by the public (subtracting out the “inter-agency” debt derived mostly as borrowing from the Social Security Trust Fund), is:
This graph attempts to back-compute the interest rate on the debt from the federal interest payments and the debt held by the public at the time. Notice how the regression equation makes it so that, every 7 years, an extra percentage point of interest is tacked onto the federal debt. By 2029, the interest rate surpasses 7%.
But that is only if the currently quarterly increase in interest rate on the debt continues. Things could change, even for the worse. Currently, when viewed as a share of all federal tax receipts taken in by the federal government, in just 6 quarters, interest payments went from 20% of federal tax revenue collected up to 35%:
If that trend continued, then federal interest payments would exceed all of federal tax revenue by 2029 — because, each quarter, interest payments chew-up another 2.55% of all tax revenue. Now let’s envision the world imagined by the Wharton professor, where the interest rate on federal debt jumps to 7%:
The first data point at left is Q1 of 2022, so the share shown at left is that which would have been, had the interest on the debt already hit 7%. The entire regression uses 7% throughout, so the rise of 2.21% per quarter is based simply on the rising load that the raw debt comprises based on the tax receipts.
Getting out from under our debt “death-spiral” will be somewhat painful, but not getting out from under it is sure to be much worse. We should resist calls for a Great Reset and, instead, restore the economic freedom which the USA used to have back in the 1920s — before the federal government became large and obtrusive.
This “can” will not be able to be get kicked down the road much farther.
Reference
U.S. Department of the Treasury. Fiscal Service, Federal Debt Held by the Public [FYGFDPUN], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/FYGFDPUN
U.S. Bureau of Economic Analysis, Federal government current tax receipts [W006RC1Q027SBEA], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/W006RC1Q027SBEA
U.S. Bureau of Economic Analysis, Federal government current expenditures: Interest payments [A091RC1Q027SBEA], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/A091RC1Q027SBEA