Tales Of Debtwoe

The chart just below shows interest expense of the U.S. national debt, plotted yearly, for fiscal years 2001 to 2010. (The U.S. government's fiscal year ends Sept. 30th.) Observe that, after a few years of sinking early last decade, it took off. A slump in 2009 was partially reversed in fiscal year 2010:



It doesn't look that good for the U.S.' fiscal health, does it? Actually, that chart bodes worse than appearance suggests. This next chart graphs, on a monthly basis, the average interest rate on Tresury debt excluding Treasury Inflation Protected Securities (TIPS):



What the second graph shows is the Treasury's average rate more than halving in the same timeframe. Had that rate stayed constant, interest expense would be well on its way to the moon.

The reason why interest expense on balance went up, even though the average rate plummeted, is shown on this graph of the U.S. national debt. Onward and upward it goes:




Needless to say, the above three charts show a nascent debt crisis that's been forestalled by fortuitously low interest rates. World demand for dollars helped do its part by cushioning the inflationary impact of money supply growth.

Lowered rates can't last forever. Should they rise again, though, the Treasury is going to be faced with a huge squeeze. The Fed's QEII has done its part to forestall a rise in rates...for now, anyway.

Once it stops working, or has the reverse effect, the interest component of the U.S. governmental budget is going to balloon. There would have to be major spending cuts or else the Treasury will be too squeezed by the servicing costs to keep up. Those costs have the potential of forcing major spending cuts anyway, unless there's a debt spiral with the Treasury borrowing furiously to get more cash despite rising rates. Once the bond vigilantes return in force, that kind of spiral is like running on an automatic treadmill with a ratchet: the faster you go, the faster it motors - without slowing down.

There's only one institution that will buy Treasury securities with no questions asked if circumstances become exigent: the Fed. A pressing need to monetize a national debt bubble would be enough to push the U.S. dollar into hyperinflation.

I don't know when the breaking point will be reached. All I know is it'll be too late once it does; the choice is either hyperinflation or a major depression, as the government would no longer be able to forestall the liquidation of malinvestments or even look after its own if the hyperinflation path is avoided.

There seems to be some awareness of the coming fiscal crunch in D.C. Witness the recent campaign to shame "greedy boomers" for taking the Social Security and Medicare benefits they've been promised.