What Happens to the National Debt When Interest Rates Surge?
The country has racked up a lot of debt (maybe you've heard). But, thankfully, interest rates are at all-time lows. That's saved you, the taxpayer, a bundle. Even though the national debt has tripled in the last 18 years, the amount the government spends annually on interest payments has declined from $232 billion in 1995 to $222 billion today.
But what happens when interest rates rise?
What if they rise a lot?
What will that do to budget deficits?
The common answer is, with a $16 trillion national debt, rising interest rates will blow a hole in the budget deficit. This seems unshakably, arithmetically, true. And it probably is. I've written a warning about it several times.
But there's another side to the story I've been thinking about, and it quiets the doom-and-gloom narrative down quickly.
The nation's finances have been here before. Worse, even. In 1946, just after World War II, public debt stood at 109% of GDP, compared with 77% today. And short-term interest rates hovered around 0%, just as they do today.
But from 1945 to 1980, interest rates surged from 0% to more than 11%. This is exactly what we fear happening today.
What did this rate spike do to the country's interest-payment bill? From start to finish, basically nothing:
Put this all together, because it's important:
- National debt was much higher in 1945 than it is now (in relation to the size of the economy).
- From 1945 to 1980, interest rates rose from 0% to 11%.
- This did virtually nothing to the real cost of paying interest on the national debt.
For more on the national debt, check out my report, "Everything You Need to Know About the National Debt." It walks you through with step-by-step explanations about how the government spends your money, where it gets tax revenue from, the future of spending, and what a $16 trillion debt means for our future. Click here to read it.
The article What Happens to the National Debt When Interest Rates Surge? originally appeared on Fool.com.Follow Morgan Housel on Twitter @TMFHousel. The Motley Fool has a disclosure policy.
Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.