The national debt is back in the news after the federal government crossed a depressing threshold this week: $30 trillion in debt. This figure does rely on some weird logic, but the true debt is at least $23.4 trillion. So, it’s worth pointing out that if one small change happens, the growing national debt bomb could blow up in our face.
The debt always crowds out private sector investment and drags down economic growth. But right now, we aren’t feeling the pain of our mounting debt burden too much, because interest rates are at historic lows. As Manhattan Institute scholar Brian Riedl has long warned, that will eventually change—and when it does, we’re in for a real headache.
As the below graph shows, interest rates were unusually low in 2021. The official interest rate was 1.5 percent. When you factor in inflation, it was actually negative. But throughout American history, interest rates have usually run much higher than this, at 5 or 10 percent.
Some people think that today’s low interest rates mean it’s a great time for the federal government to borrow and spend massive amounts of money. But this is woefully misguided. The rates on the debt actually recalculate over time, so when interests rates go up in the future, all our past debt will soon become much more expensive and costly to manage.
American taxpayers are already spending $900 million every day just covering the interest payments on our existing debt.
— Brad Polumbo 🇺🇸⚽️ 🏳️🌈 (@brad_polumbo) February 3, 2022
When interest rates inevitably go up, we’ll have to pay more and more in federal taxes just to cover the interest payments. By 2050, nearly half of your federal tax bill will go to paying interest. And that tax bill is going to get a whole lot bigger. The Peter G. Peterson Foundation projects that we’ll have to pay $60 trillion in federal taxes over the next 30 years just to cover the interest on the national debt.
To put that number in context, it’s more than twice as big than the current size of the economies of China, Japan, Germany, and the United Kingdom combined. It averages out to hundreds of thousands of dollars in federal taxes over 30 years for every American. (This is just for context, taxes are of course not actually split equally among citizens).
And that’s just the interest payments.
If you think our debt is crazy now, just wait until you see how big it gets if interest rates exceed the federal government’s current predictions by even just a few percentage points. In that case, according to Riedl’s calculations, the national debt could rise to more than 300 percent of GDP—three times bigger than our entire economy—over the next few decades.
Unfortunately, the media warnings about the debt will quickly fade into background noise after the temporary interest peaked in the federal government’s finances by that $30 trillion headline is eclipsed by the next story. Yet this problem is growing and growing in the background. As soon as interest rates seriously rise, it may just blow up in our face.
Maybe then America will start taking fiscal responsibility seriously again. But that’ll be too little, too late.