The Fed’s dichotomy as interest on the debt now costs the government $500 billion per year from their budget
On May 4 it was determined that the U.S. taxpayer (government) now pays over $500 billion per year in interest on the nearly $20 trillion of national debt. Â That equates to 13% of their annual budget which as of last year was $3.8 trillion before adding another $1 trillion or so in deficit spending.
Thus both the government and the Federal Reserve are in a quandary, especially as the economy begins to slow and tax revenues are declining. Â This is because the central bank has shifted gears towards raising interest rates versus lowering them, and for every 1% hike in rates it will cost the U.S. approximately $250 billion extra, and that is IF the U.S. borrowed no more money. Â And since government liabilities are beyond any realistic measure to cut through fiscal policies, we can easily assume that the current $1 trillion added each year to the national debt will only increase, and thus increase the amount of money the government must pay in interest no matter what the Fed does to interest rates.
So the bottom line is that there is nothing either the Fed or the government can do to stop the destruction to the nation’s budget through the ever increasing liability of interest on the debt thanks to their decision in 2008 to embark upon a bank bailout program, and then continue it through the Fed’s programs of quantitative easing. Â And like any process that falls under the auspices of compounding interest, at a certain point the cost will skyrocket into the realm of exponential growth.
Kenneth Schortgen JrÂ isÂ a writer for The Daily Economist, Secretsofthefed.com,Â Roguemoney.net, and Viral Liberty, and hostsÂ the popular youtube podcast on Mondays, Wednesdays and Fridays.Â Ken can alsoÂ be heard Wednesday afternoons giving an weekly economic report on theÂ Angel Clark radio show.