Home Economic Trends $30 Trillion Debt Matters – Robert Aro

$30 Trillion Debt Matters – Robert Aro

With the Federal Funds Target rate set between 0.75% and 1.0%, and the Fed’s promise to increase rates and reduce asset purchases in the coming months, some consideration should be paid to servicing the USA’s $30.5 trillion debt.

To get a better sense of the interest expense, TreasuryDirect provides the average interest rate, as of April of last month, being 1.659%. See below:


Average Interest Rate

Borrowing $30 trillion at less than 1.659% may not seem all that bad; but because something works today, doesn’t mean it will continue working tomorrow. Notice on the chart, total marketable securities are borrowed at 1.528% and non-marketable securities at 2.123%. Marketable securities are more widely recognizable as they include treasury bills, notes and bonds traded in the secondary market. As of last month, approximately $23.3 trillion in debt was marketable, while only $7.1 trillion was non-marketable, per below.


Marketable and non-marketable securities

The trouble ahead is easier to spot when the New York Fed explains the mechanism at which the Fed can buy or sell US debt:

The New York Fed’s Open Market Trading Desk (the Desk) purchases Treasury securities in the secondary market and rolls over maturing Treasury security holdings…

Should all go as planned, next month it will be in the secondary market where the Fed will really show its influence again, this time reducing the number of treasuries holdings by up to $47.5 billion a month.

Unless other entities step up purchases to fill the void left by the Fed, it’s expected rates will continue increasing. Maybe we’ll see wild fluctuations in interest rates in the not too distant future.

How high rates will go is anyone’s guess. But clearly there must be an interest rate that is simply too high. Carrying $30 trillion becomes progressively difficult when rates are rising, as each 1% increase in the average interest rate adds $300 billion more of an annual interest expense.

Maybe that’s why CNBC noted:

Federal Reserve Chairman Jerome Powell acknowledged that increasing interest rates will “include some pain,” but added that a far worse outcome would be for prices to continue spiking.

Chair Powell sees raising rates as the cure for increasing prices. We shall see how effective this strategy is in due time. But, no one has provided the strategy to cure our high debt level. Even at an average interest rate of 3 to 5%, normal, if not low, by historical standards, the interest payment on US debt seems crippling. And if the US government is borrowing at 3-5%, one can hardly imagine what the average consumer would borrow on a mortgage, or corporation on a bond.

Of course, there is one way to ensure rates stay lower for longer which involves the Fed purchasing more debt and increasing the money supply. Don’t ever discount this as a viable option according to the Fed; undoubtedly, no matter what the next crisis is, even if it’s rising prices or a collapsing currency, balance sheet expansion will be put forth as the solution. They’ll say it worked in the past, so it should work in the future.