Tuesday, October 13, 2009

Interest Expense of the US National Debt

I read a piece in the Wall Street Journal yesterday by Lawrence Kadish that left me stunned.

Kadish uses CBO and Bureau of the Public Debt figures to sketch out a horrifying scenario.

At the end of last month, the US national indebtedness stood at nearly $12 trillion. Interest expense for this year on that amount will be $383B.

Kadish then uses CBO figures to derive this year's estimated personal income tax payments as around $904B. Dividing the interest expense for this year into personal income taxes, he derives the shocking rate of more roughly 40%.

True, one could use the estimated $2 trillion government receipts for 2009 instead, making the figure a more palatable 19%. But, in reality, taxes are always and ultimately borne by people. Institutions merely collect taxes indirectly for governments.

Kadish goes on to note that the US government has run deficits constantly, except for those few years of the elusive "peace dividend" following the USSR's breakup, for decades. So, predicting to the mean, or prior behavior, it probably will try to do so going forward, as well.

Now, due in part to the recent financial meltdown and global flooding of liquidity by central banks, interest rates on Treasuries are currently around 3%. But in the Carter years, it was as high as 15%.

Now add in OMB's projections of deficits amounting to some $9 trillion over the next decade, meaning a near-doubling.

You can see the awful mathematical conclusion, can't you? If rates move up, as they most certainly will as liquidity is drained globally, and too many dollars require ever-higher rates on US Treasuries, the current nearly $400B interest tab could easily swell by a factor of at least 5- twice for the larger debt level, and 2.5 times for the interest rate effect.

Will US per capita income rise by five-fold in a decade? Unlikely. Unless you mean purely through inflation. Real incomes certainly will not. If the US economy grew at a steady 3.5% each year and it was all due to productivity, meaning the entire gain went to increase personal incomes, they would only grow by about 40%.

Kadish goes on to state,

"Eventually, most of what we spend on Social Security, Medicare, education national defense and much more may have to come from new borrowing, if such funding can be obtained."

The options, Kadish writes, will become default or hyperinflation.

In prior decades, when our debt was widely held by western powers and investors, our appetite for social programs hadn't reached its current level. Longer ago, the US dollar was a prized, stable store of value in the post-WWII era.

Now, the world's major growth economies are no longer friends, e.g., China, Brazil, India. They won't necessarily even do us the favor of lending in dollars. If so, it will be at exorbitant rates.

Kadish's final point is to cite Steve Forbes as saying that the national debt is one issue which will motivate US voters to take action on Washington's profligacy.

I believe that. But on the way there, it's going to get very scary.

Imagine explaining to the average taxpayer that his annual tax liability is nearly half-consumed for just interest on our borrowing to pay for our lush social programs. And we're adding more, by the way.

And that, in a few more years, that figure will be easily more than half. So Washington will continue to try to borrow abroad to pay for promises it is increasingly unlikely to be able to keep to all parties- citizens, investors, and other countries.

Perhaps this is why I'm finding less to write about in the corporate world these days than in the world of Washington-centric business and financial dealings.

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