Nov 8, 2023
Interest Payments on the US Government Debt Will Soon Increase Significantly, Interest Rates Will Likely Stay High Far Longer
Treasury Secretary Janet Yellen has made the biggest blunder in Treasury Department history for not issuing more long dated bonds when interest rates were at historic low rates.
Bonds are a debt instrument. When the government sells a bond, they promise to pay a set interest rate for a certain period of time. The interest rate is based on interest rates when the bond is sold and does not change.
If the Treasury Department had sold more bonds with longer terms, they could have locked in low interest rates for up to 30 years. Yet they failed to do so.
Most people refinanced mortgages when interest rates are at historic low rates.
The Treasury Department is now selling bonds with interest rates 2-3 times higher interest rates than a year or so ago. Interest payments on the debt will increase rapidly.
In 2022, the federal government paid $879 Billion interest on the debt. This is the 3rd largest expense in the Federal budget. It is more than the entire Department of Defense budget.
According to the Congressional Budget Office, total annual outlays will be about $10 trillion in 10 years, mostly due to increased interest payments.
According to hedge fund titan Stanley Druckenmiller, if interest rates remain the same interest expense will be 4.5% of GDP in 10 years. Interest expense will be 7% of GDP in 20 years. This is 144% of current discretionary spending.
Discretionary spending is about one-third of total expenditures. Most of the direct activities of the federal government are included.
Mandatory spending is about two-thirds of total expenditures. This includes entitlement programs, Social Security and Medicaid, and interest on the debt.
We likely will face one of two scenarios sooner than most people expect:
1. Debt Death Spiral: Unless government spending is reduced significantly soon, the country will go into a debt death spiral. The interest will continue to grow rapidly, until the interest payments are more than total revenues.
2. Austerity Measures: Bond buyers (mostly large institutional investors) stop buying bonds. When the government can no longer sell their bonds, it will be forced to live within its means. The government will only be able to spend revenues received. This will create short-term economic chaos but create financial responsibility longer-term. All government benefits would have to be dramatically cut and/or taxes significantly increased. My opinion is this is the more likely option. This happened with Greece about 10 years ago.
Higher bond rates will keep interest rates higher. The size of the federal debt will likely keep interest rates higher for an extended time. The bond market has already increased at the fastest rate since 1792.
In this environment interest rate sensitive assets will thrive. These include bonds, bank accounts, and dividend paying life insurance policies. Asset values on most stocks and real estate will suffer. We are seeing the effect recently.
Your Personal Bank dividends are interest rate sensitive and will thrive in a higher interest rate environment.
As government interest payments increase, the pressure to increase revenues through higher taxes will rise. Your Personal Bank dividends grow income tax-free and you can access tax-free. This shields you from likely higher future tax rates.
Your Personal Bank allows you to reduce market risk and volatility with your portfolio. You can grow your money safely, with guarantees, tax-free, and highly liquid.
Contact Ferenc at 866-268-4422 or yourpersonalbank.com for more info.