Interest rate hikes affect more than how much people pay for mortgages, car loans and credit card debt. Higher rates also affect how much money the federal government must put toward financing the national debt.
Unsurprisingly, those payments are getting larger, too. And there's a real possibility interest payments on the federal debt could exceed defense spending before the decade is out:
Higher rates could add an additional $1 trillion to what the federal government spends on interest payments this decade, according to Peterson Foundation estimates. That is on top of the record $8.1 trillion in debt costs that the Congressional Budget Office projected in May. Expenditures on interest could exceed what the United States spends on national defense by 2029, if interest rates on public debt rise to be just one percentage point higher than what the C.B.O. estimated over the next few years.
The Fed, which slashed rates to near zero during the pandemic, has since begun raising them to try to tame the most rapid inflation in 40 years. Rates are now set in a range between 3 and 3.25 percent, and the central bank's most recent projections saw them climbing to 4.6 percent by the end of next year — up from 3.8 percent in an earlier forecast.
Federal debt is not like a 30-year mortgage that is paid off at a fixed interest rate. The government is constantly issuing new debt, which effectively means its borrowing costs rise and fall along with interest rates.
These higher debt service costs ought to send official Washington into a panic. As we've seen with the United Kingdom, where the new Tory government had to abandon its supply-side economic plan in the face of a bond market rebellion, there could – could – come a time when that same bond market decides U.S. fiscal policy is such a mess, bond buyers will demand higher interest rates for what might be considered risky debt.
That's not to say this happens tomorrow or even a decade from now. But the cautionary tale is playing out right now with one of the world's largest economies. The bond vigilantes are back, and they play for keeps.
Our own spend-happy political class – and yes, that includes both major political parties – had best clean up its act. Or the markets will do it for them – rapidly, painfully and with a maximum level of humiliation.
The opinions expressed in this article are those of the author and do not necessarily reflect the positions of American Liberty News.
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The federal government could probably be cut in half and nobody would notice.