- by New Deal democrat
With 10 and 30 year Treasury bonds hovering close to 20 year highs in the past week, there has been a flurry of talk about how this will hamstring any future Democratic Administration from delivering economic programs, due to the increase in how much money will be needed to pay interest on the national debt, which crossed $40 Trillion last week.
Leaving aside that some economic programs, like “Medicare for All,” would likely be more efficient and thus a net cost saving for the American people, let me focus on the raw numbers and some information on how we (recently) got here.
Let’s start with the amount of quarterly interest payments that need to be made on the debt (blue, left scale) compared with nominal GDP (gold, right scale):
At the turn of the Millennium, quarterly interest on the debt was about $80 million, while GDP was about $10 Trillion. Ten years ago, interest payments had risen to about $120 million, but GDP had increased to about $16 Trillion. There was a spike during T—-p’s first term that subsided by the time of the pandemic, but since 2022 interest rates have risen rapidly to about $300 million, while GDP has risen to $32 Trillion.
To see the stress that might put on the federal budget, let’s divide interest payments by GDP. This tells us what percent of GDP must be devoted to interest payments:
This tells a more interesting story, because between the turn of the Millennium and the pandemic, only 0.6% to 0.7% of the budget needed to be devoted to paying interest. But in the past five years through the end of Q2 this year, that has risen to almost 1.0%. While this isn’t quite as bad as the 1.25% required during Reagan’s 1980s Presidency, it’s definitely not good.
But before you put that down to strictly budgetary issues, here’s a comparison of the interest payments to GDP ratio as above with the 10 and 30 year Treasury bond yields:
While the correlation is by no means perfect (see especially the late 1980s), in general long term interest rates and the share of GDP that needs to be paid in interest have risen and fallen roughly in tandem.
And as the below graph shows, often 10 and 30 year Treasury yields respond strongly to changes in the Fed funds rate (blue):
Since the turn of the Millennium, the long end of the bond market had not reacted strongly to Fed funds rate hikes, increasing only about 1% in both the 2005-07 and 2018-19 episodes. But they *did* react very strongly to the Fed’s rate hikes in 2022-23, rising from about 1.5% to almost 5.0% in late 2023, and remaining over 4.0% almost ever since.
Thus the biggest reason for the increase in interest payments due can be laid at the feet of the interest rate policy by the Federal Reserve.
But that isn’t the entire story, in part because the Fed itself was reacting to heightened inflation during that period (itself largely a byproduct of soaring house prices as measured with a 12-18 month delay by the official CPI measure). But in the last 18 months, a good part of the explanation can be traced to the inflationary “policies” of the T—-p Administration.
Because beginning in late 2024 the Fed started to lower interest rates. But despite that, the 10 and 30 year bond yields remained stubbornly elevated, and the 30 year has been on an increasing trend:
And below I show both the 30 year mortgage rate (blue) vs. the 10 and 30 year bond yields over the last four years, with all three normed to “0” as of the week of T—-p’s inauguration:
Yields have not only remained elevated, but increased first at the time of the “Liberation Day” tariffs, and then again with the onset of the iran war. This is the effect of what I dubbed “Guns and Butter 2” last week - raiding the cookie jar to pay for military adventures and upper class tax cuts.
Here (via Wolf Street) is the last 60 years of federal government deficits and (rarely) surpluses as a percent of GDP:
The era of the Reagan tax cuts stands out, as do the Great Recession and COVID stimuli. But also note that during T—-p’s first term, even before COVID, and even with a strong economy, deficit spending was rising. The same thing happened in the last two years of Biden’s term, and so far in the first two years of T—-p’s second term. It is this last episode which is ultimately unsustainable, and is likely to give rise to rising interest payments as a share of GDP, much as was the case during and after “Guns and Butter 1” during the 1960s and 1970s.
And where is the money going to have to come from to fix this problem? The below graph norms interest payments (blue) to 100 as of the beginning of T—-p’s first term, and compares that rate of increase with median household income (red), average hourly wages (gold), corporate profits (purple), and stock market prices (orange):
Only stock prices have risen at a higher rate than interest payments. Ordinary households are in no condition to shoulder further rates of increases in interest payments. Corporate profits haven’t risen at the same rate either, although those are in much better shape (and in Q2 may have increased another 10%).
The bottom line is that the US economic situation will suffer greatly if we have entered a period of accelerating interest rates and inflation. And to be clear: this isn’t the lower classes voting themselves money out of the national treasury, but rather the uppermost of the wealthy and cronies connected to this Presidency who have effectuated this biggest mafia-style bust-out even perpetrated.
