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December 14, 2011

What Higher Interest Rates Means for the US Interest on Debt Expense

The above chart represent the interest expenses on our national debt estimated in all three of President Obama's budgets. Currently, we have paying a little more than $400 billion per year. However, according to the White House, interest on the debt is expected to exceed $1.2 trillion by 2020, triple what it was in 2009.

The reason is two-fold. One, America will have trillions more in debt by 2020 (approximately $6 trillion) and secondly, interest rates are expected to be higher by that time. Now, you'll notice that the more recent budget shows a dip in the estimated interest expense over the past few years. This is because interest rates have stayed lower than expectations since 2009.

Markets tend to have lower interest rates during recessions. Does the fact that interest rates are lower than they were in 2009 reflect the difference in the OMB's expectations of the economy and its outcome?

According to the Obama Administration's economic assumptions spreadsheet, the estimated interest rate on long-term Treasury bills is 5.3% and 4% on short term Treasury bills. If a debt situation similar to the one in Italy were to unfold in the United States, the interest expense amount could easily exceed $2 trillion per year. That's an $800 billion increase per year of the deficit for a country that would already have trouble borrowing funds.

So, how quickly do we need to get our act together?

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