{"id":32809,"date":"2023-02-03T02:23:00","date_gmt":"2023-02-03T02:23:00","guid":{"rendered":"https:\/\/www.lifeandnews.com\/articles\/?p=32809"},"modified":"2023-02-04T06:40:09","modified_gmt":"2023-02-04T06:40:09","slug":"us-is-spending-record-amounts-servicing-its-national-debt-interest-rate-hikes-add-billions-to-the-cost","status":"publish","type":"post","link":"https:\/\/www.lifeandnews.com\/articles\/us-is-spending-record-amounts-servicing-its-national-debt-interest-rate-hikes-add-billions-to-the-cost\/","title":{"rendered":"US is spending record amounts servicing its national debt \u2013 interest rate hikes add billions to the\u00a0cost"},"content":{"rendered":"\n<p><a href=\"https:\/\/theconversation.com\/profiles\/gerald-p-dwyer-1409160\">Gerald P. Dwyer<\/a>, <em><a href=\"https:\/\/theconversation.com\/institutions\/clemson-university-1819\">Clemson University<\/a><\/em><\/p>\n\n\n\n<p>Consumers and businesses aren\u2019t the only ones <a href=\"https:\/\/www.bloomberg.com\/news\/articles\/2022-11-30\/debt-rising-interest-rates-put-consumers-and-businesses-at-risk\">feeling the pain of higher borrowing costs<\/a> because of Federal Reserve rate hikes. Uncle Sam is too.<\/p>\n\n\n\n<p>The U.S. government spent a record US$213 billion on interest payments on its debt in the fourth quarter, up $63 billion from a year earlier. Indeed, a jump of almost $30 billion on the previous quarter represents the <a href=\"https:\/\/fred.stlouisfed.org\/series\/NA000308Q\">biggest quarterly jump<\/a> on record. That comes as the Fed <a href=\"https:\/\/www.federalreserve.gov\/monetarypolicy\/openmarket.htm\">lifted interest rates a whopping 4.25 percentage points<\/a> from March through December.<\/p>\n\n\n\n<p>As <a href=\"https:\/\/www.clemson.edu\/business\/about\/profiles\/gdwyer\">an economist<\/a>, I am concerned that the effect of higher interest payments on the government\u2019s budget is being ignored. Higher interest payments mean the federal government will either have to lower spending, raise taxes or issue more debt to service its obligations. And financing interest payments by issuing more debt could be a particularly poor choice \u2013 sooner or later, the bill will come due.<\/p>\n\n\n\n<figure class=\"wp-block-embed is-type-wp-embed is-provider-datawrapper wp-block-embed-datawrapper\"><div class=\"wp-block-embed__wrapper\">\n<iframe class=\"wp-embedded-content\" sandbox=\"allow-scripts\" security=\"restricted\" title=\"US interest payments rocketed as Fed hiked rates\" src=\"https:\/\/datawrapper.dwcdn.net\/EoqXR\/2\/#?secret=AyuKgGqLYt\" data-secret=\"AyuKgGqLYt\" scrolling=\"no\" frameborder=\"0\" height=\"400\"><\/iframe>\n<\/div><\/figure>\n\n\n\n<p>The <a href=\"https:\/\/theconversation.com\/why-america-has-a-debt-ceiling-5-questions-answered-164977\">national debt<\/a> \u2013 the amount the federal government borrows to balance the budget \u2013 increases when spending is greater than revenue and accumulates over time. As a general rule, it increases over time because of increases in spending, revenue and the deficit. Inflation <a href=\"https:\/\/www.pgpf.org\/blog\/2022\/07\/how-does-inflation-affect-the-federal-budget\">tends to increase<\/a> government spending, as well as revenue and deficits. As a result, the dollar value of government debt increases in times of inflation. Debt also tends to grow as the economy gets bigger \u2013 although this is not inevitable as policymakers could choose to balance the government\u2019s budget.<\/p>\n\n\n\n<p>In this way, total government <a href=\"https:\/\/fred.stlouisfed.org\/series\/GFDEBTN\">debt has climbed over the years<\/a> \u2013 by the end of 2022 it was 10 times larger than it was in 1990. It currently <a href=\"https:\/\/fiscaldata.treasury.gov\/americas-finance-guide\/national-debt\/\">stands at over $31 trillion dollars<\/a> and represents more than 120% of the nation\u2019s gross domestic product. GDP is the total annual amount of goods and services produced by a country and often is used to judge whether debt is high or low.<\/p>\n\n\n\n<p>Since 1990, <a href=\"https:\/\/fiscaldata.treasury.gov\/americas-finance-guide\/national-debt\/\">government debt has more than doubled<\/a> relative to the size of the economy \u2013 indicating that servicing debt could be quite a bit more of an issue than it once was.<\/p>\n\n\n\n<h2>A decade of record-low borrowing costs<\/h2>\n\n\n\n<p>But how concerning are these numbers? After all, it is not as if the government debt has to be paid off every year.<\/p>\n\n\n\n<p>Government borrowing has some similarities to a person paying for an expensive item with a credit card, with the actual amount due to be paid off over an extended period. Just as with purchases on credit, interest is applied \u2013 and can add to the overall outlay. The federal government is different from consumers, though \u2013 it need not pay off its debt for the foreseeable future.<\/p>\n\n\n\n<p>In terms of interest payments, the U.S. has been fortunate in recent years. <a href=\"https:\/\/fred.stlouisfed.org\/series\/FEDFUNDS\">Historically low interest rates<\/a> since the <a href=\"https:\/\/www.federalreservehistory.org\/essays\/great-recession-and-its-aftermath\">2008 financial crisis<\/a> have held down interest payments. And just as low interest rates encourage would-be homeowners, for example, to take out a larger mortgage, they have also made it much more attractive for the federal government to borrow money to pay for whatever Congress and the administration want to finance.<\/p>\n\n\n\n<p>But then came 2022. <a href=\"https:\/\/www.economist.com\/finance-and-economics\/2022\/12\/21\/2022-has-been-a-year-of-brutal-inflation\">Soaring inflation<\/a> \u2013 which <a href=\"https:\/\/www.bls.gov\/opub\/ted\/2022\/consumer-prices-up-9-1-percent-over-the-year-ended-june-2022-largest-increase-in-40-years.htm#:%7E:text=Consumer%20prices%20up%209.1%20percent,U.S.%20Bureau%20of%20Labor%20Statistics\">reached levels not seen in 40 years<\/a> \u2013 meant an end to the days of near-zero interest rates. To restrain inflation, the <a href=\"https:\/\/www.cbsnews.com\/news\/federal-reserve-hikes-interest-rates-seventh-time-2022\/\">Fed raised rates seven times<\/a> in 2022, taking the base rate from near zero to a range of 4.25% to 4.5% at the end of 2022. The Fed raised rates a <a href=\"https:\/\/www.marketwatch.com\/story\/fed-inches-interest-rates-up-another-quarter-percentage-point-11675278086\">further 0.25 percentage point<\/a> at its monetary policy meeting that wrapped up on Feb. 1. Projections made by Federal Board members indicate that, with future increases, rates will average 5% or more in 2023.<\/p>\n\n\n\n<p>Not all government debt, however, carries these current higher interest rates. Just as with typical U.S. mortgages, much of the government debt bears the interest rate applied when it was taken on. The difference is, unlike homeowners, the government does not pay off its debt. Instead it rolls over old debt into new debt \u2013 and when it does so it takes on whatever the interest rate is when the debt is rolled over. And when this happens and interest rates have risen, the cost of servicing the overall debt goes up.<\/p>\n\n\n\n<h2>There may be trouble ahead<\/h2>\n\n\n\n<p>The federal government\u2019s interest expense has only begun to reflect the higher interest rates. The average rate the U.S. paid in 2022 <a href=\"https:\/\/fiscaldata.treasury.gov\/americas-finance-guide\/national-debt\/\">was just over 2%<\/a>, which is up from the 1.61% average in 2021 but still lower than it\u2019s been over much of the past decade. But even so, the effect is being felt. Since the Fed began hiking rates, the U.S. government\u2019s exposure to debt interest has climbed sharply.<\/p>\n\n\n\n<p>It may all sound a little worrying, especially amid <a href=\"https:\/\/www.cnbc.com\/2022\/12\/23\/why-everyone-thinks-a-recession-is-coming-in-2023.html#:%7E:text=Economists%20have%20been%20forecasting%20a,the%20consensus%20view%20among%20economists.\">talk of a recession<\/a> \u2013 it is as if the interest on your credit card or mortgage suddenly jumped at a time when you were facing a possible cut in wages.<\/p>\n\n\n\n<p>But there are some reassuring economic projections as well. Inflation <a href=\"https:\/\/www.cato.org\/blog\/inflation-fell-19-second-half-2022-107-first-1\">declined substantially<\/a> in the second half of 2022 and appears likely to be under control. And there is good reason to think that interest rates of 4% \u2013 or even less \u2013 are in the U.S.\u2018s future, as well as in the Federal Reserve projections. Whether there will be a \u201csoft landing\u201d in the economy \u2013 that is, a slowdown that avoids a recession \u2013 is not so obvious. While it is not inevitable, many indicators point to a recession in 2023.<\/p>\n\n\n\n<p>Either way, the days of borrowing trillions of dollars at near-zero interest rates to finance extravagant spending are over for the foreseeable future.<\/p>\n\n\n\n<p><a href=\"https:\/\/theconversation.com\/profiles\/gerald-p-dwyer-1409160\">Gerald P. Dwyer<\/a>, Professor Emeritus of Economics and BB&amp;T Scholar, <em><a href=\"https:\/\/theconversation.com\/institutions\/clemson-university-1819\">Clemson University<\/a><\/em><\/p>\n\n\n\n<p>This article is republished from <a href=\"https:\/\/theconversation.com\">The Conversation<\/a> under a Creative Commons license. Read the <a href=\"https:\/\/theconversation.com\/us-is-spending-record-amounts-servicing-its-national-debt-interest-rate-hikes-add-billions-to-the-cost-198280\">original article<\/a>.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Gerald P. Dwyer, Clemson University Consumers and businesses aren\u2019t the only ones feeling the pain of higher borrowing costs because of Federal Reserve rate hikes. Uncle Sam is too. The U.S. government spent a record US$213 billion on interest payments on its debt in the fourth quarter, up $63 billion from a year earlier. Indeed, [&hellip;]<\/p>\n","protected":false},"author":44,"featured_media":32810,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[277],"tags":[13315,224,3371,350,13319,13317,13460,1580,348,11014],"_links":{"self":[{"href":"https:\/\/www.lifeandnews.com\/articles\/wp-json\/wp\/v2\/posts\/32809"}],"collection":[{"href":"https:\/\/www.lifeandnews.com\/articles\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.lifeandnews.com\/articles\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.lifeandnews.com\/articles\/wp-json\/wp\/v2\/users\/44"}],"replies":[{"embeddable":true,"href":"https:\/\/www.lifeandnews.com\/articles\/wp-json\/wp\/v2\/comments?post=32809"}],"version-history":[{"count":1,"href":"https:\/\/www.lifeandnews.com\/articles\/wp-json\/wp\/v2\/posts\/32809\/revisions"}],"predecessor-version":[{"id":32811,"href":"https:\/\/www.lifeandnews.com\/articles\/wp-json\/wp\/v2\/posts\/32809\/revisions\/32811"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.lifeandnews.com\/articles\/wp-json\/wp\/v2\/media\/32810"}],"wp:attachment":[{"href":"https:\/\/www.lifeandnews.com\/articles\/wp-json\/wp\/v2\/media?parent=32809"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.lifeandnews.com\/articles\/wp-json\/wp\/v2\/categories?post=32809"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.lifeandnews.com\/articles\/wp-json\/wp\/v2\/tags?post=32809"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}