Looking at the debt clock today i had noticed that while the US national debt was 14 trillion, that wasn't the most alarming figure unfortunately. The net interest on debt was 200 billion, that is quite staggering if you think about it, the reason why is because we are basically at 0.25% interest rates. Interestingly enough both republicans and democrats have spoke in public about various ways to reduce the out of control budget, which reached 1.3 trillion deficit in 2010, either via cuts to entitlement spending or raising taxes on higher earning Americans. Even Rand Paul's bill to cut 500 billion from various departments still wouldnt even solve half the existing fiscal year problem.
The above talks about a yearly fiscal deficit problem we are trying to tackle, however hypothetically lets assume we miraculously end up not adding to the deficit in the following years, we would have 200 billion of interest to pay overseas countries and debt holders at ultra low interest rates. Imagine if we were to increase those interest rates due to an improving economy, to say 1% or even 2% over time? So on one hand we have increase tax receipts to the federal government, perhaps cut the deficit by 1/3 if the economy booms, however the problem we now have is out of control debt obligations, these interest debt obligations could double or triple depending on the rates and would essentially wipe out gains from a booming economy.
However the fact remains is that we are going to add to the deficit, and we are going to add to the interest and deducting the amount the economy loses to pay debt holders. Also who knows how long we are going to add to this debt before getting back to neutral. What is quite concerning is that the Obama administration has proposed the approach that we grow our way out of the problem, through a booming economy as if it will solve all our problems. The problem is, no US administration likes the idea of paying back our existing debt obligations for some reason.
Also, what does growing our way out of the deficit mean? To me it sounds like some economic formula that if we keep adding more people every year we somehow have economic boom ? if we increase our population say from 312 million today, adding millions more immigrants + babies born - deaths + illegals every year = more consumers = wall street is happy = more debt to share around = more money we can print from fed = inflating property values = people feel richer = economic boom?
Im not sure if this congress can handle the hard decisions to put us back on the right road to economic responsibility, eventually when that interest bill gets large enough, we will be forced to do something or default.
The views expressed are the subjective opinion of the article's author and not of FinancialAdvisory.com
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