Cut and pasted from Moon of Alabama blog:
Bar: On the subject of debt, interest payments, and fiscal
This is an excellent, clear, short, well-researched and thorough explanation of:
How much US Gov’t debt there is, and how fast it’s growing
How much interest the USG pays, and how fast it’s growing
How much fiscal deficit (outlays exceed income) the US Gov’t incurs every year, and how fast that’s changing
How much of the existing debt has to get “rolled over” – old bonds retired, new bonds issued in their place
How interest payments compare to the outlays for Social Security, Medicare, Medicaid, and Defense (the top-five outlays for the USG)
If $7 Trillion in _existing_ debt has to be rolled over this year – from a minimum interest rate of 1.65% (the recent minimum reached in 2021) to the current rate of 3.96%, (that’s for a 1-year T-bill – the shortest-duration, lowest interest rate instrument currently on offer) – that’s a difference of 2.31%.
That rolled-over $7T will immediately add another $161 Billion to the current annual interest outlay of $970 billion, for a total annual outlay of $1.13T. Remember, that’s just to service the _existing_ debt, not the additional debt we’ll add this year (because the US is spending waaaaaay more than we’re bringing in).
$1.13 Trillion a year, just for interest. It’ll be the second-biggest USG outlay, after Social Security.
Not $1.13T for education, infrastructure, or an industrial policy (invest in strategic technologies / industries of tomorrow)…no money for our future. Our Federal budget will be spent on transfer payments (Soc Sec, Medicare, Medicaid, etc.) and Defense and Interest, and that’s it. And we’ll have to borrow more in order to pay for those few things.
That’s all bad news, but it might get rather worse. What if the interest rate go up, from it’s near-historically-low current level of 3.9%…. up to, say 7%, as some barflies posit?
Whether the interest rate goes up that much depends on how many buyers there are for USG debt. How eager to buy and hold dollars will people be? If inflation continues to rise (today’s dollars are worth more / will buy more than tomorrow’s dollars), then it doesn’t make sense to hold dollars (own Bills or Bonds) unless the bond’s interest rate exceeds the inflation rate, or there’s no where else safe to park your dollars.
Foreign buyers of USG debt are having some problems right now. The gulf oil producing states … aren’t making much money these days, and can’t buy USG debt. Japan can’t buy any more; can’t afford it. Many other central banks- who in the past held a great deal of USG debt instruments – are quietly unloading (selling, and _not_ buying) their USG debt. China is unloading dollars. The offshore banking countries – like UK, Cayman Islands and so forth – they are the only buyers that have lately been increasing their holdings.
Who are these offshore holders of USG debt? Who, indeed.
If the Fed is the main (obvious) buyer of USG debt – the buyer of last resort- and the Fed prints dollars in order to buy bills and bonds, then the value of existing dollars automatically falls (now there’s way more dollars chasing same number of goods for sale). That behavior by the Fed can become a very nasty feedback loop in a short time.
There’s a big debate going on now about whether the Fed will raise rates, keep them the same, or lower rates.
Consider: what if the Fed lowers the interest rate, and then the US Treasury offers $1T of notes and bonds at that lower interest rate.
What if only a few buyers step forward to buy them because the interest rate doesn’t compensate the note or bond owner for the loss of value of the dollar over the term of the note or bond?
Worse yet, what if the main buyer turns out to be the Fed, or some (unknown) buyer operating behind the curtain in the offshore banking centers? What kind of story does that tell about the dollar?
If the value of the dollar falls – via simple price increases in the goods you buy, or by money-printing inflation via the Fed, why would you want to hold dollars? Would you expect – no, not “expect” – you’d “demand” – the interest rate on the USG debt you hold to rise as inflation rises?
Indeed you would.
That interest rate on new USB debt issues is dictated by an international market, not by the Fed, and not by the USG.
Is the debt going to continue to rise? Will inflation continue to rise? Will there be new buyers of USG to replace the ones that can’t buy new issues now?
Yes definitely and yes definitely and then probably not – unless interest rates rise a _lot_.
So I think interest rates are headed up, unless some geopolitical event scares the entire world enough that they flee to the USD as the only safe harbor in a big storm.
Could such an big geopolitical event happen? Sure. We’re seeing it happen now, only in slow motion. The big question is whether the geopolitical event is mis-managed well enough to scare the buyers permanently away from the dollar, rather than toward it.
Posted by: Tom Pfotzer | Sep 10 2026 21:23 utc | 19
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