{"id":9628,"date":"2023-11-20T16:09:19","date_gmt":"2023-11-20T16:09:19","guid":{"rendered":"https:\/\/zacksim.com\/financial-professionals-insights\/?p=9628"},"modified":"2023-11-20T16:09:20","modified_gmt":"2023-11-20T16:09:20","slug":"1-trillion-interest-payment-on-u-s-government-debt","status":"publish","type":"post","link":"https:\/\/zacksim.com\/financial-professionals-insights\/1-trillion-interest-payment-on-u-s-government-debt\/","title":{"rendered":"$1 Trillion Interest Payment On U.S. Government Debt?"},"content":{"rendered":"\n

Could the U.S. Government Soon Be Paying $1 Trillion\u2026In Interest<\/em>?<\/strong><\/p>\n\n\n\n

Ballooning U.S. debt and deficit spending has been a major headline over the last few months. The coverage has been warranted. According to the Congressional Budget Office, the gap between spending and revenue was $1.7 trillion in fiscal year 2023, which means the deficit grew by $300 billion year-over-year\u2014even as the economy was expanding.1<\/sup><\/p>\n\n\n\n

One particular data point made some waves last week. A Bloomberg analysis indicated that estimated annualized interest payments \u2013 made by the U.S. government on outstanding debt \u2013 crossed over $1 trillion at the end of October. That\u2019s double what it was less than two years ago.<\/p>\n\n\n\n

I don\u2019t want to dispute the idea that the debt, deficits, and interest payments are rising at a troubling pace. The chart below clearly lays out soaring interest payments the U.S. government is making on debt, which crowds out other types of more productive spending:<\/p>\n\n\n\n

Interest Payments on Gross U.S. Government Debt<\/em><\/strong><\/p>\n\n\n\n

\"\"
Source: Federal Reserve Bank of St. Louis2<\/sup><\/em><\/strong><\/figcaption><\/figure>\n\n\n\n

But the headline that annualized interest payments are now over $1 trillion needs some clarifying. For one, the U.S. government paid $659.2 billion in net interest in fiscal year 2023, which ended in September. So, we\u2019re not at $1 trillion yet.<\/p>\n\n\n\n

The analysis showing $1 trillion in interest payments is in reference to fiscal year 2024, but it\u2019s also based on outstanding gross debt and the average interest rate on the debt. A more accurate calculation would consider outstanding net debt, which removes debt owned by the U.S. government (about $7 trillion).<\/p>\n\n\n\n

By this measure, the U.S. government would owe an average interest rate of 2.97% on about $26 trillion of debt, which is a little less than $800 billion in interest payments in 2024. For context, $800 billion is about 18% of the roughly $4.4 trillion in revenue the U.S. government collected in 2023. If tax revenue in 2024 is higher than it was in 2023, then the percentage would scale down a bit. It\u2019s also important to point out that 18% is roughly where interest payments as a percent of tax receipts were during most of the 1980s and 1990s, which were both solid periods for the economy and stocks.<\/p>\n\n\n\n

Another way to frame interest payments is as a percent of GDP, which I did in a recent column addressing deficit spending. I pointed out that high-interest rates in the late 1970s and early 1980s pushed interest costs as a percent of GDP to levels much higher than we\u2019re seeing today, and the U.S. economy managed to work its way through it.<\/p>\n\n\n\n

Federal debt interest payments as a percent of GDP<\/em><\/strong><\/p>\n\n\n\n

\"\"
Source: Federal Reserve Bank of St. Louis3<\/sup><\/em><\/strong><\/figcaption><\/figure>\n\n\n\n

Bottom Line for Investors<\/strong><\/p>\n\n\n\n

There is no doubt that rising deficits amid higher interest rates could pose a headwind to economic growth. If the government finds itself spending an increasing percentage of total tax revenue on interest payments each year, it will mean having less money to spend on everything else.<\/p>\n\n\n\n

It\u2019s this \u201ccrowding out\u201d of spending that has tended \u2013 historically at least \u2013 to spur Congress into action. Elevated interest expenses in the 1980s led to several rounds of deficit reduction legislation in that decade and in the years following, which ultimately resulted in a budget surplus in the mid-1990s. Whether or not we see similar action from Congress in the near future remains to be seen, especially since the economy remains resilient and interest rates are back at historically \u2018normal\u2019 levels.<\/p>\n","protected":false},"excerpt":{"rendered":"

This week, Mitch shows that the $1 trillion interest payment figure is a bit overblown and, while worrisome, not unprecedented in percentage terms. <\/p>\n","protected":false},"author":4,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[181,1],"tags":[],"class_list":["post-9628","post","type-post","status-publish","format-standard","hentry","category-financial-professionals","category-mitch-on-the-markets"],"acf":[],"_links":{"self":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts\/9628","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/users\/4"}],"replies":[{"embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/comments?post=9628"}],"version-history":[{"count":2,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts\/9628\/revisions"}],"predecessor-version":[{"id":9632,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts\/9628\/revisions\/9632"}],"wp:attachment":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/media?parent=9628"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/categories?post=9628"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/tags?post=9628"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}