US Interest Payment Could Hit $1.6 Trillion Per Year By December

Even if interest rates are cut this year, payments will still hit $1.2 trillion annually.

How high will the debt rise?

The US national debt is rising at an unsustainable rate, as the government borrows more than it collects in tax receipts. Although the recession many feared has not materialized, the Biden administration is still running a deficit (although both successive Republican and Democrat governments have done the same). The US debt is on track to hit $52 trillion by the end of 2033.

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US debt is set to spiral by another $20 trillion in a decade, and there’s little hope that either Republicans or Democrats will bring it under control.

However, in the short term, it is likely to be interest rates that make the biggest difference.

Rolling Over The Debt

Debt repayments recently passed $1 trillion per year, but that figure could soon swell to $1.6 trillion if interest rates aren't cut.

Much of the debt is in the form of bonds with a duration of just one or two years. Borrowing occurred when interest rates were far lower, and in some cases, close to zero.

When those bonds reach maturity, they need to be refinanced, or rolled over. In practice, this means borrowing the same amount of money. Of course, interest rates are now at 525-550 bps, so the repayments are that much higher. In a scenario where interest rates are held at their current level of 5.25%, repayments will increase by 60%.

Even if interest rates are cut by 1.5% over the course of the year, which is what the market expects, repayments will still increase by $200 billion.

The Fed's Bind

The Federal Reserve is therefore in a difficult position. Chair Jerome Powell recently admitted that the debt was unsustainable. However, inflation is also higher than he would like, and remains stubbornly above the 2% target.

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Even the Federal Reserve Chair is sounding alarm bells about the size and unsustainability of the national debt.

Keeping interest rates high is necessary to bring inflation back down, and Powell will be wary of declaring the job done too soon, since inflation has a way of coming back if not properly dealt with.

However, the longer rates are held high, the more money is spent on debt repayments. At present, the US government is running a deficit simply to ensure it meets its repayment obligations, which are almost 3% of GDP. This risks the possibility of being forced to print money just to cover debt payments, again pushing the country into an inflationary spiral.

At this point, there are no good options, only less-bad ones.

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