A deeper look at the history and sources of interest payments on the national debt

 

 - 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.

Weekly Indicators for August 17 - 21 at Seeking Alpha

 

 - by New Deal democrat

My “Weekly Indicators” post is up at Seeking Alpha.

I don’t have much to add to the conventional wisdom this week. The rise in long term interest rates to near-20 year highs, and the continued inflationary pressure from the T—-p Administration’s “policies” are the overarching story. That sound you hear is some of the birds starting to come home to roost.

As usual, clicking over and reading will bring you up to the virtual moment as to the status of the data, and reward me with a penny or two in lunch money for my efforts.

The latest on the inflationary expansion of 2026, a/k/a “Guns & Butter 2”

 

 - by New Deal democrat

Today let’s take a look at the first reads of August business activity, from the New York and Philadlephia Feds, and put those in context of our current economic and fiscal situation, which I have been describing as an inflationary expansion.

Both of those components, both the expansion and its inflationary aspects, were given further confirmation by both Fed regional districts’ manufacturing reports. 

First, here is the average of the headline number for both indices (blue) and the more leading new orders component (red):

Any number above 0 indicates expansion. For August, the headline average was 34.0 and the new orders average was 23.7. The last several months have been on par with the post-pandemic Boom in 2022. Here is further context with the long term historical graph:

Again, the past two months’ averages have been as good as the very best readings since the turn of the Millennium (as far back as the FRED numbers go). 

That’s the good news. The bad news is that inflationary pulse continued as well. Here’s the historical graph of the diffusion indices of both prices paid by producers (blue) and prices received by them downstream (red):

The current widespread pricing pressures on the incoming end, which is only partially being passed on downstream, is also as bad as at any time since the turn of the Millennium, with the exception of the post-pandemic period and the gas price-driven spike during the first seven months of the Great Recession.

The close-up of the last several years shows that the inflationary pulse began with the “Liberation Day” tariffs of April 2025, but was subsiding a little earlier this year, until the Iran war sparked a second round of more widespread price increases beginning in March:

In other words, the inflationary expansion continues.

But let me put this in some wider context as well, because it occurred to me that the T—-p Administration’s policies, with one major exception, are very similar to LBJ’s “guns & butter” fiscal policies during the Vietnam War.

Wars are expensive, and anytime a government wages one, generally it must either raise taxes (guns) or else cut other budget items, like goodies for the populace (butter). Hence, typically the choice is “guns *or* butter.” But if a government chooses to fund a war via the national credit card, and maintain its domestic priorities as well, that is the “guns and butter” approach. And both LBJ and T—-p have chosen the latter. In the case of T—-p, this also includes the Big Bad Budget Bust-out Bill’s upper income tax cuts, and also the stagflationary tariff impositions. Another huge difference is that LBJ’s “butter” was aimed at the poor and the working classes via the “Great Society” programs, while T—-p has directed a firehose of benefits to the ultra-wealthy and his cronies while (literally) taking the food out of the mouths of the food-insecure.

So now let’s look at what happened to interest rates on the 10 year Treasury (blue, left scale) vs. YoY consumer inflation (red) and Federal government expenditures (orange, normed to 100 as of January 1, 1964, right scale) during LBJ’s Presidency and beyond:

By the end of LBJ’s Presidency, Federal outlays had grown by 45%. By the end of the 2nd Quarter of his second year in office, they had grown by 4.2%. In early 1964, just after LBJ assumed the Presidency, the long-dated Treasury interest rate was just over 4%. By the end of his Presidency in January 1969, it has climbed as high as just over 6% in May 1968. In January 1964, consumer prices were rising at 1.6% YoY. By January 1969, inflation was 4.7%.

Now here is the same data for the last four years, plus the yield on the 30 year Treasury (which wasn’t issued until the mid-1970s):

So far in T—-p’s 2nd Administration, Federal outlays are up 6.2% (and that’s just 1 Quarter into the Iran war). Long-dated treasurys via the 30 year bond have risen from as low as 4% in late 2024 to over 5.3% earlier this month, and the 10 year has risen from 3.7% to 4.7%. And inflation, which was 2.4% YoY at the beginning of 2025, is currently at 3.4% after having risen as high as 4.2% several months ago.

There is no indication that T—-p has any consciousness of, let alone desire to change, any of the dynamics in “Guns & Butter II.” Thus there is every reason to expect a similar inflationary and interest rate record, with the exception that the ramifications of the closure of the Strait of Hormuz, or some other blunder, may unlike LBJ’s term, result in a stagflationary recession.

Some day the positive trend in unemployment claims will end —- but not this week

 

 - by New Deal democrat

As per usual on Thursdays, let’s take a look at the very good short leading indicator of jobless claims.

The bullet point take is that they continue to be among the most positive indicators of all at the moment. Last week only 206,000 people filed initial claims, down -6,000 from the week before. The four week moving average increased 4,250 to 204,000. And with the typical one week lag, continuing claims rose 18,000 to 1.799 million:

All of these continue at historically very low levels.

On the YoY% basis more important for forecasting, initial claims were down -11.6%, the four week moving average down -9.5%, and continuing claims down -8.1%:

This continues to be very positive for the economy.

Finally, let’s take our first look at what this likely means for the unemployment rate beginning in September:

Note this week instead of the usual representation of the unemployment rate, which is rounded to the first decimal, I used the actual numbers that make up the rate, showing how it has declined fairly consistently since the end of last year. The input from jobless claims suggests that there is still room for the unemployment rate to decline further, to 4.0% or even lower, and very little chance of any significant increase.

The mini-recession of 2025 vs. the AI wealth effect inflationary expansion of 2026

 

 - by New Deal democrat

No significant economic news today, so let’s take the proverbial “35,000 foot” look at the US economy in the past two years.

One of the things I have gone back and forth on over that time is whether there was a “mini-recession” late last year. As of the lastest revised data, I believe there was, from a peak in July through the end of the government shutdown in November.

Here’s a look at four important data series the NBER uses to date recessions: employment (blue), industrial production (red), real total sales (gold), and real income less government transfers payments (purple) for the past two years:

Two of the series, production and sales, hit interim peaks in July. The other two, employment and income, made peaks in September only slightly higher than their interim peaks in July. [Note, by the way, that I’ve had to amplify the volatility in employment *2 simply so that it doesn’t appear as a squiggle]. The average decline in the four series through the end of November was about -0.5%.

I haven’t included real GDP in the graph, partly because the NBER doesn’t particularly give it importance, and partly because real GDP can and has in the past - notably in 2001 - risen between the beginning and the end of recessions.

Last summer and autumn were only a “mini-recession” in part because the downturn only lasted 4 months, and partly because the -0.5% average decline was not sharp enough to qualify. By contrast, here are the same metrics for the shallow 2001 recession:

From peak to trough, in 2001 all four metrics declined at least -1.0%, and three of them by at least -1.5%.

Aside from not being deep or long enough, fundamentally why didn’t the mini-recession of 2025 manifest as a full-blown consumer-led downturn, despite real income declining more than -1.0% through April of this year? In addition to real total sales and industrial production trending higher by over 1% so far this year, the below graph tells the tale:

If real income has been down over -1%, and real aggregate payrolls only up 0.7%, stock market wealth has increased almost 25% since July of last year. 

This is the “K-shaped” economy. In addition to the inflationary tax cuts in last autumn’s Big Bad Bust-out Budget Bill, this 25% increase in stock market wealth has been driving a splurge in spending, the austerity being visited on those without stock market holdings be damned.

In conclusion, an important caution: these are coincident indicators; i.e., this is a nowcast, and should not be projected forward. Aside from a further geopolitical shock, per my commentary earlier this week, I would be looking for a downturn in corporate profits, and a downturn in real sales per capita, plus a continued stall in real aggregate payrolls, before I would change my current short term forecast. In other words, the above describes an inflationary expansion.