How much could the interest rate on the U.S. deficit increase in the next few years?



  1. 0 Votes

    The US national debt is not controlled at one specific interest rate. It’s not like the federal government goes to a bank and takes out a loan with an interest rate and a specific repayment schedule, the way individuals and businesses do. Although people often talk of the “national debt” or the “deficit” as monolithic entities, they are not. The national debt consists of treasury bills issued by the US government, which have variable interest rates, and a whole host of other instruments backed or regulated by the treasury. What the exact interest rate is on any particular instrument will vary depending on how much was loaned, to whom and when. When you hear the term “prime rate” bandied about on financial news programs, what they’re talking about is the interest rate at which the government is borrowing money, which fluctuates over time and also varies depending on whether the loan is short-term, mid-term or long term. “The Fed’s” interest rate is a major driver of what private institutions such as banks are also loaning money at, which is why it’s a big deal when the Federal Reserve changes the interest rate.

    It’s impossible to tell what interest rates will do in the future. If you develop a surefire way to see into the future and determine the behavior of interest rates, you will probably become the richest person in the entire world, at least until you wreck the entire financial system. Federal spending and revenue collection are highly political processes, especially now when the deficit has re-emerged as a major political issue (as it was in the 1980s under Ronald Reagan). It’s probably safe to assume that the federal government will continue to operate with an unbalanced budget, but just how much and how long it will supposedly take to get spending back in line with revenue is going to be much of the story of our politics over the next few years. Many schemes have come and gone over the years to try to balance the budget and retire a greater percentage each year of the outstanding national debt. If you’re young you may not remember terms like “Gramm-Rudman-Hollings” or “the flexible freeze,” both of which are now long obsolete ideas, but I’m sure we’ll see more projected solutions coming out of Washington and the private sector for as long as the federal government holds any significant debt.

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