We wanted to talk about federal debt in context of the cost of the government carrying this debt. If you talk to some people you might hear that this debt is out of control. People can agree or disagree if this an accurate assumption. Federal debt is at a record high. However, if you were to look at it closer you will see that it is almost always at a record high. So the question becomes when will it hit an extreme or become overwhelming.
Cost of Debt
What is important to look at is not just the total debt but the cost of the total debt. The cost to cover that debt is actually not at an all-time high. Relative to the 1980’s and 1990’s it’s actually lower. If you remember back to those times there was a lot of talk about cutting government spending and focus on the deficit. Politicians actually acted on this in the late 90’s with a balance budget. The reason for this is that the interest on that debt was high enough in which a percentage of government spending had to go to interest.
If you are a politician and you want to get re-elected and you have to spend money on interest instead of things such as pet projects or cutting taxes to get your constituents to vote then you may have a problem. As long as the cost of carrying that debt is low, politicians will be able to promise more spending because they won’t have spent a higher percentage of that annual revenue to service that debt. If we start to see interest rates go up and the cost of servicing that debt goes up you will probably see politicians on both sides start to discuss how we need to solve this debt problem by cutting spending. As long as the carrying costs in which interest rates are low and U.S. government debt is cheap you will likely hear through the political system of not cutting spending but where it’s being spent. This could include cutting taxes which increases spending or the need to increase spending on healthcare. Until we see higher rates, it’s difficult to see politicians seeing any reasons to be incentivized to cut spending. This is just something to keep in mind as you are watching what will be a long presidential cycle.
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