The National Debt and You!!

Back in 2000 the National Debt was $5.7 trillion and interest on this debt was $227 billion. In 2000, the government brought in $1.8 trillion in tax revenue and spent $1.7 trillion. Amazing, in 2000, the government actually spent less than it collected in revenue, just like all the rest of us have to do. Debt to GDP was 61.5% and governmental spending as a % of GDP was 36.31%.

In 2004 the government began to spend more than they collected in revenues racking up a deficit of $388 billion in 2004 alone. The national debt increased to $7.1 trillion and interest on this debt actually fell to $155 billion, despite the $1.4 billion increase in debt.

By 2008 the national debt had increased another $2.5 trillion to $9.6 trillion and the interest expense increased to $219 billion. Debt as a % of GDP increased to 70% and government spending as a % of GDP was almost 40%.

In the time Obama has been in office the debt has now climbed to $14 .2 trillion, double what it was back in 2004. Interest on the debt, thanks to historically low interest rates is $205 billion. However, Debt as a % of GDP is now almost 100% (97.56%) and governmental spending as a % of GDP is 46.38%.

This trend can not continue – government has gotten too big and it now threatens the credit rating of the nation. We need to start taking the finances of this country seriously and quit trying to demonize anyone who tries to suggest a way to bring our fiscal house in order.

Between 2000 and 2011 the effective rate paid on the outstanding US debt has fallen from 3.98% to 1.44%. These rates will not last forever, in fact rates are likely to increase in the next 24 months. So, what will happen to the interest on the national debt, even if we don’t add any more debt, which we all know will never happen? The answer should concern us all.

If we do not add one more dollar to the national debt and if we assume that interest rates increase 200 basis points, this would make the effective rate on the debt 3.44%. While that rate seems reasonable and below what the rate was back in 2000, the effect on the interest payments is substantial.

At 1.44% the annual interest paid to debt holders is $205 billion, which is almost as much as the government collects in Corporate Income taxes. If rates rise and the effective rate becomes 3.44%, the interest on the current national debt would increase $283 billion to $488 billion. This $488 billion is equal to 44% of the revenue generated through individual income taxes.

To put this even more clearly, 44 cents of every dollar in individual income taxes that the government collects would have to be used to pay just the interest on the debt. This only leaves 56 cents to fund the rest of the budget items and leaves nothing for paying down the debt.

Doing nothing is not an option. Making reductions to increases in spending and calling them cuts like the government has done for years is no acceptable. Making minor tweaks to discretionary spending is not going to amount to anything. We need radical change or you will have to suffer through the devaluation of the currency and that will be a whole lot more painful than reducing the size of government.

The time for action is now and failure to act will have consequences far worse the economic downturn we just experienced.