Of Debt And Interest Rates

When it comes to economics I am much stronger in discussing fiscal as opposed to monetary policy. There is an intersection of the two and my mind drifted toward the latter while reading a book on foreign policy a few weeks ago, (strange how the mind works sometimes.) My entire thought process got caught up in interest rates. It’s somewhat complex so let’s explore.

As of this writing our national debt stands at a bit over $20.5 trillion. The Trump Tower Tax Cut and the recent CR (more about that below) are slated to add about another $2 trillion in the near future. Therefore projecting a $22 trillion national debt is actually somewhat conservative. For easy figuring I’ll work with that figure from here.

Now for a quick clarification of the legislation that ended the Trump Shutdown 2.0. It was more of a CR than a grand bargain. The best analogy I read was written by Sarah Ferris in Politico. She wrote that the size of the pie (or to be more specific pies) was determined with how large the slices will be still pending. Basically the CR set two budgets and omnibus legislation will have to allocate those dollars; which has to be enacted by March 23rd.

The other thing the CR accomplished was to suspend the debt ceiling until March of 2019. I’m of the school of thought that the debt ceiling is silly in the first place and should be done away with. The debt ceiling has to be raised periodically to allow the Treasury to pay the bill that the Congress has already incurred. Contrary to the beliefs of many it is not new spending; it is covering current obligations. Both Parties use it as a rhetorical football depending on whether they are in the majority or minority. I’m in favor of simply doing away with it.

Since the American dollar is the global de facto reserve currency we enjoy a tremendous advantage in that our national debt is pegged in a currency we control. In order to maintain that situation we need to keep the confidence the world has in our currency and by extension our economy.

By definition all this debt is borrowed money and even slight interest rate rises have huge effects. At $22 trillion a 1% rise translates to $220 billion; 2% translates to $440 billion. To put that somewhat into perspective we spend a total of about $50 billion on the much wrongly maligned foreign aid.

Back in my youth one of the biggest reasons college student were taught to basically “dismiss” the national debt was because we largely owed it to ourselves. That is not the case today with foreigners holding about half of our “paper”. At the risk of sounding misogynist, I go back to an example I often use that the American economy is the least ugly girl at the dance. Under Trump’s isolationism we aren’t getting any more attractive to the rest of the world. What happens if global investors suddenly start asking for a premium to buy our debt? Worse yet, what if they decide to start pegging transactions to a currency other than the U.S. dollar? The former could take place sooner and more rapidly than the latter. Fortunately for us another more attractive currency doesn’t seem to be readily available.

I’m not against borrowing; I just want to do it for a good purpose like investing in public education or useful infrastructure that makes us more competitive in the global economy of the 21st century. Borrowing money to fund big tax cuts to people who don’t need them is folly.

America is a debtor nation and it currently behooves us to keep interest rates low.

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