Let me give you some basic math on why I believe the Fed is so desperate for low interest rates.
My math will be
approximate but, I believe, no less valid.
Our total deficit is somewhere around $31 trillion.
Our annual spending in the U.S. budget is approximately $5.5 trillion.
We allow for roughly 5% of this $5.5 trillion to be spent on debt service.
So, some quick conversion:
1. 5% of 5.5 trillion is 275 billion
2. 1% of 31 trillion is 310 billion
In context:
For each 1% increase in interest rates, the cost
of servicing the U.S. debt will increase by approximately $310 billion. This is more than the entire amount budgeted for debt service and equates to more than 5% of the U.S. budget.
In other words, a 1% increase in rates effectively doubles the cost of servicing the U.S. debt. Now of course the government can just roll that interest cost into longer-term debt, but it would then just be paying more interest on interes
t.
Spending seemed great to many politicians when rates were near zero but with the current rate structure some things will have to change right away.
So, when you hear the Fed bravely declare that they will keep raising rates, it is best to consider that the Fed is truly desperate for lower rates.