The Cost Of Servicing Our National Debt

Here’s an interesting number from the WSJ Economics blog — 3.4%. That’s what the CBO estimates will be the share of GDP that we pay in interest every year on the national debt in 2020.

Thanks to the Federal Reserve’s efforts to keep interest rates extremely low, the U.S. government is currently getting a very good deal on its borrowings, according to the Congressional Budget Office. In 2010, it paid an average of about 0.1% interest on 3-month Treasury bills, and 3% on ten-year notes. Total net payments amounted to $197 billion, or 1.4% of annual economic output. That’s a bit more than what the government spent on unemployment insurance.

Low interest rates, however, won’t last forever — assuming the U.S. economy doesn’t succumb to long-term, Japanese-style stagnation. The CBO estimates that interest rates on 3-month bills and 10-year notes will reach 5.0% and 5.9%, respectively, by 2020. That, together with a rapidly rising debt load, would cause annual net interest payments to more than double by 2020 — to $778 billion, or a record 3.4% of GDP. That’s closer to what the government spends every year on national defense.

Then again, any number of unanticipated events could cause interest rates to rise more quickly and bring that 2020 date forward pretty quickly. It’s worth remembering how quickly several European countries saw their borrowing rates skyrocket as investors demanded big risk premiums.

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