$4.8 trillion - Interest on U.S. debt

[Heracles 417]

Unless lawmakers make big changes, the interest Americans will have to pay to keep the country running over the next decade will reach unheard of levels.

By Jeanne Sahadi, CNNMoney.com senior writer

Last Updated: November 19, 2009: 1:05 PM ET

NEW YORK (CNNMoney.com) -- Here's a new way to think about the U.S. government's epic borrowing: More than half of the $9 trillion in debt that Uncle Sam is expected to build up over the next decade will be interest.

More than half. In fact, $4.8 trillion.

If that's hard to grasp, here's another way to look at why that's a problem.

In 2015 alone, the estimated interest due - $533 billion - is equal to a third of the federal income taxes expected to be paid that year, said Charles Konigsberg, chief budget counsel of the Concord Coalition, a deficit watchdog group.

On the bright side - such as it is - the record levels of debt issued lately have paid for stimulus and other rescue programs that prevented the economy from falling off a cliff. And the money was borrowed at very low rates.

But accumulating any more interest on what the United States owes at this point is like extreme sport: dangerous.

All the more so because interest rates will rise when private sector borrowers return to the debt market and compete with the government for capital. At that point, the country's interest payments could jack up very fast.

"When interest rates rise even a small amount, the interest payments go up a lot because of the size of the debt," Konigsberg said.

The Congressional Budget Office, which made the $4.8 trillion forecast, already baked some increase in rates into the cake. But there is always a chance those estimates may prove too conservative.

And then it's Vicious Circle 101 - well known to anyone who has gotten too into hock with Visa and MasterCard.

The country depends heavily on borrowing to fund what it wants to do. But the more debt it racks up, the more likely it becomes that creditors could demand a higher interest rate for making new loans to the government.

Higher rates in turn make it harder to pay off the underlying debt because more and more money is going to pay off interest - money, by the way, which is also borrowed.

And as more money goes to interest, creditors may become concerned that the country can't pay down its principal and lawmakers will have less to fund all the things government is supposed to do.

"[P]olicymakers would be less able to pay for other national spending priorities and would have less flexibility to deal with unexpected developments (such as a war or recession). Moreover, rising interest costs would make the economy more vulnerable to a meltdown in financial markets," the CBO wrote in its most recentlong-term budget outlook.

So far, that crisis of confidence hasn't happened. And no one can predict with any certainty whether or when it could occur.

But should it occur, the change could be abrupt.

That's because the government frequently rolls over - or refinances - the debt it has issued as it comes due.

In other words, when a Treasury bond or note matures, the government must pay the investor the face value on that debt. In order to do that, the Treasury borrows money to pay back the investor, which means the debt would be refinanced at whatever the going interest rates are at the time.

Just how much churn is there? Of late, a fair bit it seems. A Treasury borrowing advisory committee reported in early November that "approximately 40 percent of the debt will need to be refinanced in less than one year."

Since rates may well stay low over the next year, it's possible that debt could be refinanced at the same or even lower rates. But that situation won't last forever.

So what will Washington do?

To help mitigate the potential risk of rising rates, the Treasury has said it would start increasing the average maturity of the new debt it issues. That way the debt it refinances in the next couple of years will be locked in at lower rates for longer periods of time.

And the Obama administration has promised to produce a deficit-reduction plan that would aim to bring down annual deficits to roughly 3% of GDP over the next several years, below the 4% to 5% currently projected.

If that happens, the $4.8 trillion in interest payments that CBO estimates for the next decade could go down if interest rates don't increase as much as CBO expects.

"There will be less debt outstanding than if we don't get the deficit down. It may also reduce [the average interest rate on the debt] since less debt means less pressure on interest rates," said William Gale, co-director of the Tax Policy Center.

But whether they can do that within a few years of an economic recovery is another matter. "Even under the president's [2010] budget as evaluated by the CBO we do not get anywhere close to that," Gale said.

That could mean the president's 2011 budget proposals would have to make a lot of changes to get closer to the 3% goal. Unpopular changes like tax hikes and spending cuts.

Budget hawks hope the president will push for a deficit-reduction commission to come up with ways to cut the deficit and then propose legislation that lawmakers would only be able to vote for or against. The reason: There is no political will to make the tough calls. Especially in a mid-term election year.

First Published: November 19, 2009: 11:58 AM ET

Find this article at:

http://money.cnn.com/2009/11/19/news/econo...erest/index.htm

[Niels Bohr 72]

Well, looks like I will volunteer to pay the high tax option on my tax return.

[Heracles 417]

If the country does not raise taxes across the board, it will seriously end up like the Soviet Union.

The implementation of a federal GST/VAT is an absolute must.

Edited November 20, 2009 by Booyah!

[Gary and Alla 3,694]

Democrats consider it stimulus money

[Gary and Alla 3,694]

If the country does not raise taxes across the board, it will seriously end up like the Soviet Union.

The implementation of a federal GST/VAT is an absolute must.

You mean there will be beautiful women everywhere?

Actually, I agree. Eliminate all forms of income tax and replace it with a GST!

[Heracles 417]

You mean there will be beautiful women everywhere?

Actually, I agree. Eliminate all forms of income tax and replace it with a GST!

Beautiful women? Ah yes I see I see. We need to waive the 10 year sibling visa deal with certain countries.

Eliminate income tax? The country would be bankrupt.

Same deal when I hear people talking about cutting taxes to stimulate the economy. Um Regan used that in the 80's to deal with stagflation; we are in a recession. Tax cuts have no effect when people have no income and no job. The government needs to tax, tax, tax. And then invest in mega projects that will create jobs..

[Niels Bohr 72]

You mean there will be beautiful women everywhere?

Actually, I agree. Eliminate all forms of income tax and replace it with a GST!

Beautiful women? Ah yes I see I see. We need to waive the 10 year sibling visa deal with certain countries.

Eliminate income tax? The country would be bankrupt.

Same deal when I hear people talking about cutting taxes to stimulate the economy. Um Regan used that in the 80's to deal with stagflation; we are in a recession. Tax cuts have no effect when people have no income and no job. The government needs to tax, tax, tax. And then invest in mega projects that will create jobs..

Wish people can also see that. But, many don't really care since their job is to make sure they have money for their family and food on the table. They don't have time to think of a bigger picture.

[aidan80 9]

I agree what needs to be done is introduce a sliding tax scale more you make the more you pay, earn below a certain amount pay nothing. Put VAT on everything including food. Put up taxes on cigarettes, alcohol. Create a centralised DMV and run it nationwide. Tax cars by the amount of pollution and waste they create and tax fuel more to encourage people to drive cars not small battleships on wheels. Centeralise more of government and cut out the replication of tasks on so many levels could save quite a bit there I'm sure. That and maybe cut spending to the one thing that's sucking the life outta the cash flow.. the military, slim it down a lot.

[Niels Bohr 72]

RI is implementing regionalization where municipalities are sharing their resources such as police, fire, ambulance, trash collection, water, etc...

[scandal 951]

Centeralise more of government and cut out the replication of tasks on so many levels could save quite a bit there I'm sure.

Reducing levels of government and replication of services would quite probably result in increased efficiencies and savings.

However it would come at a cost that most Americans would not want - namely centralizing government.

Americans cling fiercely to a relatively decentralized structure in which there is a balance of powers between federal and state authorities, and between state and county and municipal governments. This reflects the regional differences of the country and the individualism of citizens.

What's right for Alabama may not necessarily be right for Ohio, and what's right for LA may not be right for San Francisco. Yes, we pay a certain overhead for decentralized government but that's a tradeoff most of us happily make.

[Heracles 417]

Wish people can also see that. But, many don't really care since their job is to make sure they have money for their family and food on the table. They don't have time to think of a bigger picture.

Bingo! This each to their own attitude is the Achilles heel of present day America. I don't believe the country was always like this. Sure it was not some socialist country but it clearly also did not have the present day every man for themselves attitude.

[Heracles 417]

I agree what needs to be done is introduce a sliding tax scale more you make the more you pay, earn below a certain amount pay nothing. Put VAT on everything including food. Put up taxes on cigarettes, alcohol. Create a centralised DMV and run it nationwide. Tax cars by the amount of pollution and waste they create and tax fuel more to encourage people to drive cars not small battleships on wheels. Centeralise more of government and cut out the replication of tasks on so many levels could save quite a bit there I'm sure. That and maybe cut spending to the one thing that's sucking the life outta the cash flow.. the military, slim it down a lot.

It's amazing no one else see that here. There are ~3,441 counties in the country (excluding cities), each with their own school district, police, tax office etc etc etc. We are talking hundreds of billions of dollars worth of duplication. Ironically this inefficiency is something that socialist countries do and is know as artificial job creation. They are actually thinking of entirely scrapping counties in Aus because they found it would save them billions. This is interesting considering Australian counties as it is do not handle police, fire, schools, tax, courts etc.. So if they are saving that then the US would be able to save close to a trillion annually. That would result in more money being spent on the community (schools, police etc) and Republicans would be happy due to less taxes being required. Win/Win

A VAT or GST is a must. There are currently just too many loopholes with buying things from out of state, county, etc. Not to mention, the US is in the same position as Europe now. That is, nothing is manufactured here anymore, therefore, pushing people to buy junk just makes China and others richer. The Aus government has had federal budget surpluses since first implementing the GST ten years ago.

I strongly believe the country needs a $1 to $2 a gallon (minimum) federal fuel surcharge. Not only would it promote more efficient cars, it would reduce our reliance on oil, provide US highways with the billions they need for renovation, and it will also make mass transport viable again.

Heavily taxing cigarettes and alcohol is a no brainer. Should have been done yesterday.

Military budget needs to be halved, with the majority of money left being spent on R&D. Having bases in Italy, for example, is ridiculous.

[Heracles 417]

Reducing levels of government and replication of services would quite probably result in increased efficiencies and savings.

However it would come at a cost that most Americans would not want - namely centralizing government.

Americans cling fiercely to a relatively decentralized structure in which there is a balance of powers between federal and state authorities, and between state and county and municipal governments. This reflects the regional differences of the country and the individualism of citizens.

What's right for Alabama may not necessarily be right for Ohio, and what's right for LA may not be right for San Francisco. Yes, we pay a certain overhead for decentralized government but that's a tradeoff most of us happily make.

Centralized governments does not mean getting rid of states rights. What it means is that essential services such as police, fire and schools are managed on a state level rather than a county or city level.

"Certain Overhead": The US has exactly 3,140 counties. State of Illinois alone has 102 counties. Each one of those counties would have a school board, a superintendent, all of the county's support staff that determine curriculum etc and buildings they house these staff. Lets assume it costs a district $15 million in annual administration costs. Therefore, 3,140 counties * $15 million works out to be: $47 Billion dollars spent annually in administration alone. Now amalgamate the school systems and even double the admin costs to ensure the one set of admin staff (per state) are paid well. 50 states * $30 mill = $1.5 Billion.

That is a saving of $47 billion dollars that could be pumped straight back into education. Keep in mind the figure of $15 million is a guess and realistically the costs to administer a school district would be much much higher. Fairfax county next to my county spend $110 million alone on administration.

With each county duplicating the task of the next county, smaller government is delivering a huge loss and waste to us the tax payer; we're simply not getting value for money in return for our investment (ROI).

Edited November 20, 2009 by Booyah!

[Heracles 417]

"Having Centralized Governments does not mean"...

[Joseph & Ana 0]

By - you are no conservative. Tax and spend your brains out?

History in the US has PROVEN without a doubt that across the board tax cuts increase revenue to the IRS. Every time it is tried. Now, that doesn't mean teh gov hasn't spent their brains out even more. No, when they get more money they just spend more.