As of 2011, the federal government owes $10.1 trillion to people, corporations, and foreign
governments and another $4.6 trillion to the Social Security Trust Fund.
This doesn’t count an additional $50 trillion or more that the government has promised to
current and future Social Security and Medicare recipients that it will not have the money
to pay.
Let’s ignore unfunded Social Security and Medicare obligations and just focus on the
official debt.
What does it mean for the government to carry this much debt?
The interest rate the government pays on this debt is currently about 3 percent.
That means that this year the government will rack up $440 billion in interest charges alone.
According to the Congressional Research Service, the Iraq and Afghanistan wars cost about $140
billion per year.
That is less than one-third the amount of money the government spends on interest on
the debt.
Remember that the government must go to financial markets to borrow, just like everyone else.
So the interest rate the government pays on the debt is determined by market forces.
Today, the interest rate that the government pays on its debt is the lowest that it’s
been since the 1960s.
In fact, just three years ago the interest rate was 50 percent higher than it is today.
What would happen if the interest rate the government had to pay on its debt rose?
At the current debt level, a 1 percentage point increase in the interest rate would
cost the government an additional $147 billion a year in interest charges.
That’s more than the annual cost of the Iraq and Afghanistan wars.
In fact, comparing the government’s annual interest expense to the annual cost of all
the wars the U.S. has fought, we see that the interest rate on the debt costs us more
than half of what World War II cost annually.
At the time, World War II was the costliest effort the government had ever undertaken.
Three years ago the government was paying a 4 percent interest rate.
Ten years ago, it was paying a 6 percent interest rate.
Twenty years ago it was paying an 8 percent interest rate.
If the interest rate rises to 6 percent again—which historically is not only likely but virtually
inevitable—the interest charges the government accrues will equal the annual cost of World
War II.
If interest rates rise to 8 percent, a level we saw only a generation ago, the amount of
interest the government will pay each year will be the equivalent of waging all the wars
it has ever waged combined.
There are only two direct consequences of debt: the principle payments and the interest
expense.
Other consequences flow from these.
The more the government pays in interest, the less able it is to provide services that
people need.
This means that the government needs to take advantage of low interest rates by paying
down as much of the national debt as it can, while there’s still time.