November 25, 2022 - 9:00 pm
If you thought higher interest rates made mortgage payments expensive, look at what they’re doing to the national debt.
The Federal Reserve has spent the past several months raising interest rates. The target range for the federal funds rate — what banks charge each other for overnight loans — has gone from near to zero in early March to between 3.75 and 4 percent. The Federal Reserve is likely to continue raising rates in a belated bid to tame inflation.
As a result, interest rates have increased throughout the economy. That includes the cost of borrowing for home mortgages, which rose for a time above 7 percent. Higher rates mean higher monthly payments, which is wreaking havoc on home prices. That’s a major concern to home buyers and sellers.
But the higher rates have a more widespread effect that touches every American. The federal government owes more than $31 trillion. The debt is now more than 120 percent of the country’s gross domestic product. That’s a major problem even when the federal funds rate is under 1 percent. But when it jumps to nearly 4 percent and is likely to go higher, that’s a disaster in the making.
Last fiscal year, the government paid almost $400 billion in interest. This year, Allan Sloan, a columnist with The Washington Post, calculates the cost could be almost $580 billion. That’s nearly how much the federal government spent on Medicaid last year.
If rates stay high, the cost of servicing the nation’s debt will grow rapidly. Mr. Sloan and Marc Goldwein, senior policy director of the Committee for a Responsible Federal Budget, ran some calculations. They assumed interest rates will be 1.5 percent above projections that the Congressional Budget Office made in May.
If that happens, annual interest costs will top $1 trillion in 2027. In 2032, the annual cost of interest will be $1.7 trillion. For comparison, Social Security cost less than $1.4 trillion in fiscal year 2022. Unless something is done, interest payments will soon become the largest line item in the budget.
If you think inflation is bad now, wait until the federal government has to print money to cover these astronomical interest payments. Higher inflation will lead to higher interest rates and higher Social Security cost-of-living adjustments. That will lead to more debt. The fiscal death spiral should be obvious.
In a sane world, both parties would be proposing to take steps — even painful ones — to stop this from happening. Alas, politicians and the voters who elect them appear to prefer ignorance and indifference.