America’s soaring debt was mentioned by speakers during the Republican National Convention however, there was little talk of the implications of the debt’s impact on the American economy and even less treatment of a cure for the lurking economic and social threats the debt poses.
One question comes to mind, if we broke the iron triangle between the federal government, the national debt’s beneficiaries, and the Federal Reserve what would happen? Let me proffer one scenario. Imagine if the Federal Reserve raised interest rates to historical norms. From at dated (2014) Forbes piece:
“Historically, normal interest rates for U.S. government debt is in the range of 4 to 6%. In fact, before the recent recession both 2 and 10 year government bonds had been between 4.5 and 5.25% for the preceding two years. Rates now are approximately 0.5% for the 2 year note and 2% for the 10 year bond. The difference between the cost of the national debt at current rates and historically average ones is enormous
For the fiscal year 2014 that ended last September, the federal government paid $430.8 billion in interest on the national debt. Back in 2004 with “only” $7.3 trillion in debt, the interest bill added up to $321.6 billion. With only 40% as much debt, the government was paying 75% as much in interest. If the federal government was currently paying an historically average interest rate on the debt, instead of $431 billion in interest the annual bill would be around $900 billion.”
Now to the DC crowd, $900B may not seem like much; it is to this humble writer. Given this, I do not see the triangle being broken and low interest rates will continue to fuel bubbles of malinvestment.