If You Think Our National Debt Is a Problem Now, Just Wait

Written by Jason Simpkins
Posted February 3, 2014

We all know the unsustainable level of U.S. debt is a problem.

But it's about to become an even bigger problem in the next few years.

You see, with the Fed tapering and the U.S. economy ostensibly improving, market observers are choosing to ignore the elephant in the room...

Namely, that in about a year or so, the Federal Reserve is going to have to raise interest rates.

And when it does, the cost of financing U.S. debt is going to explode.

Here's what I mean...

Our national debt is currently about $17 trillion. The interest we pay on that debt is roughly $255 billion. That's roughly the same amount of interest we were paying in 2006, even though our debt then was less than half of what it is today.

How is that possible?

It's because interest rates are so low.

Right now, the Treasury only pays 0.01% on three-month T-bills and 2.98% on 10-year notes. That's well below the historical average of 3.3% and 5.2%.

If interest rates rise as most estimates expect (three-month Treasuries to approximately 4% by 2018 and 10-year Treasuries to approximately 5.2%) interest payments on the Federal debt will soar to $505 billion by 2018.

It's a point that Erskine Bowles, co-chair of President Barack Obama's National Commission on Fiscal Responsibility and Reform, made recently on CNBC's Squawk Box.

"If interest rates were to return to a median level they were in the 1990s, we'd be spending not $230 billion a year but $650 billion a year," Bowles said. "When you think about it, that's $650 billion that will be spent, principally in those countries we're borrowing money from, to educate their kids, to improve their infrastructure, to do the high value-added research on their college campuses, so the next new thing is created over there. That's crazy."

To put $230 billion a year in perspective, it's more than the U.S. spends at the departments of Commerce, Education, Energy, Homeland Security, Interior, Justice, State and the court system combined.

Now, take that sum and double it.

That's what we're lookng at in the years ahead...

Fight on,

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Jason Simpkins

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Jason Simpkins is Assistant Managing Editor of the Outsider Club and Investment Director of Wall Street's Proving Ground, a financial advisory focused on security companies and defense contractors. For more on Jason, check out his editor's page. 

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