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Rising Interest Rates Would Crush US Budget Under Interest Payments

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With the stroke of Pres. Trump’s pen, the national debt officially surged past the $20 trillion level. That number alone is staggering, but the increasing debt has further ramifications analysts seldom talk about. For every dollar the debt increases, the amount of money the government has to fork out every year just to service the interest payment goes up as well.

We’re talking staggering amounts of money.

Trump just signed a bill raising the debt ceiling limit for the next three months. It instantly added approximately $318 billion to the national debt, raising it to $20.16 trillion. And Trump wants to do away with the debt ceiling altogether.

According to numbers calculated by the SRSrocco Report, that $318 billion increase in the debt will require an extra $7 billion interest payment annually.

The US government spends a mind-boggling amount of money simply paying interest on the ballooning debt. In fiscal 2016, it paid out over $432 billion in interest. It is on track to hit a record high of high of $460 billion in 2017.

To put that into perspective, the entire 2016 budget for Australia was $420.5 billion.

Now consider this: the US government is making these huge payments in a low interest rate environment. The average rate on US Treasury debt today stands at about 2.2%. What would happen if interest rates rose to a more “normal” level  – say 5 to 6%?

SRSrocco did the math and figured if the interest rate on Treasury debt stood at 6.2% – as it did in 2000 – the annual interest payment on the current debt would nearly triple to $1.3 trillion.

This raises an interesting question: how can the government afford to let the Fed push interest rates up? The folks at SRSrocco don’t think it can.

There is no way the US Government will allow the interest rates to rise as it is already dealing with a $566 billion budget deficit for the first ten months of 2017.  If interest rates raised just to a typical 5%, that would push the US interest payment up above $1 trillion.  This would more than double the budget deficit to over $1.1 trillion a year. The Fed and central banks only have one way to go, and that is increasing debt levels and lower interest rates.  If they do not continue with that policy, then the entire financial system comes crashing down.”

It’s interesting to look at a chart tracking the interest rate along with the national debt. You will quickly notice the reverse correlation.

This sheds a different light on discussions about the Fed raising rates. Peter Schiff has been saying for months that the central bank is close to the end of its tightening cycle. During a recent interview on RT’s Boom Bust, Peter said the Federal Reserve will have a hard time raising rates in an environment with a weakening dollar. He said he wasn’t sure what the central bank would do in the short-run, but said in the long-term, the Fed is going to go back to a low-rate policy.

The Fed has shown a propensity to raise rates regardless of the economic data ever since Trump was elected president, so I don’t really know what they’re going to do. Maybe they’ll raise rates again before the end of the year. But regardless, I think they’re very close to the end of the cycle. I mean, anybody who’s smart now is looking beyond the next rate hike to the next cut, because that’s going to be the beginning of the next easing cycle, which I think is going to take rates back to zero, maybe even below zero. It’s going to unleash QE 4, which I think will be bigger than the first rounds one, two and three combined.”

The spiraling debt, along with climbing interest payments, add another layer to Peter’s argument. The US government simply can’t afford “normal” interest rates. That would seem to indicate we may now be living in the new normal. But what happens during the next recession? How can the Fed cut when rates are already so low? That means there is also pressure for the Fed to raise rates now, so it has room to cut the next time the economy needs “stimulus.”

The interest on the debt is just another factor that has squeezed the Fed between a rock and a hard place. No matter what the central bankers do, they are on the road to trouble.

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