By Dan Calabrese ——Bio and Archives--May 22, 2013
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Once the Federal Reserve's easy-money policy comes to an end and interest rates return to their post-World War II norms, the cost of servicing this debt will explode. The cost will increase further as the Fed sells down its $1.85 trillion holding of government bonds, and the Social Security system runs deeper and deeper into the red. The Treasury will then have to pay interest on an ever-growing percentage of the debt. Since the World War II era, the average maturity of outstanding federal debt has been about five years, and the average interest cost on a five-year Treasury note has been 5.9%. At this interest rate, the expected cost of the Obama debt burden will eventually approach some $590 billion per year in perpetuity, exceeding the current annual cost of any federal program except Social Security.As we've discussed here before, the Fed is hiding the real cost of the debt by keeping interest rates artificially low - robbing savers in the process, by the way - and putting off the day when the government's borrowing costs become so astronomical that they could become the single largest line item in the budget. And this will be an item we have no way to cut. That doesn't even begin to factor in what will happen as entitlement programs explode for want of reform, and we face the inevitability that ObamaCare will cost far more than Democrats claimed when they passed it. These momentary drops in the deficit are often worse than no change at all, because they give the political class an excuse to keep spending, since a "falling deficit" sounds like a good thing even though it's really just mounting more debt on top of what we already have. And it doesn't help when the CBO comes out and projects we'll have a deficit below $400 billion in 2015. The CBO can't possibly know that, but now that they've said it, the party is on for big-spending politicians who can claim there is no urgent problem to deal with. Um. Yes there is. We still have $17 trillion to pay back, and unfunded entitlement obligations that could top $100 trillion - an amount for which there is not enough money in the world to cover. Don't be fooled when politicians and the media crow about the deficit shrinking. When they start actually reducing the debt, then we're getting somewhere. But we're not even in the same stratosphere as that right now.
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