BUNK 46
AMERICA CAN’T HANDLE ITS DEBT
Lots of folks complain America has too much debt (Bunk 45). And we do have plenty—but one reason the debt isn’t so problematic is because paying for it isn’t as expensive as most folks fear. Our debt interest payments, as I write this in 2010, are quite low—even low compared with recent history.
As 2009 ended, America was spending over $300 billion each year just making net debt interest payments. Yikes! Sounds like a lot, but isn’t. This is another case of big, scary numbers taken out of context. We have a massive economy, so items like debt and interest payments can seem unfathomably huge. As with many “big” numbers, a simple debunkery is to consider it in scale—as a percentage of GDP—which is the right way to think about it.
Figure 46.1 shows US net debt interest payments as a percentage of GDP. Amazingly, paying for our debt, even at more elevated levels, is now about 2.2 percent of GDP and perfectly unremarkable compared to past periods.
Our net debt interest payments are lower now than any time between 1979 and 2002—which includes the big 1980s and 1990s bull markets—and not all that far above where they were in the 1950s and 1960s. Interest payments relative to GDP were nearly double what they are now from about 1984 through 1996—perfectly fine times for stocks and the economy overall.
Figure 46.1 US Federal Interest Payments as a Percentage of GDP—At Pre-1980 Levels
Source: Thomson Reuters, Federal Reserve Flow of Funds, US Bureau of Economic Analysis, US Treasury (Q1 1952 to Q4 2009).
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Low Interest Rates Lower Costs

How can our interest costs be so low when our debt is so huge? Well, first, our debt isn’t as huge relative to the size of our economy as people commonly envision (see Bunk 45). Then, too, interest rates are now historically low—they’ve been trending lower globally since the early 1980s—that’s one big reason. For our interest costs to move to 3 percent of GDP—below where they were from about 1980 to 1999—interest rates would have to move up a full 1 percent on average across the spectrum of our long-term debt. Increase our debt 50 percent relative to GDP with today’s interest rates, and we’re still under 3.5 percent—not a problematic level. Folks fear our debt is rapidly increasing, but even the most nervous Nellie probably doesn’t envision our debt increasing another full 50 percent relative to GDP in the immediate future. To get back up to those debt service levels of 1984 through 1996—terrific times overall for stocks—interest rates must rise a big two percentage points. In other words, our debt costs are cheap and perfectly manageable. They would have to increase markedly just to get to levels seen in past, economically vibrant times.
Could interest rates increase a lot? Sure—anything can happen. But think globally—our interest rates fell over the last 30 years, almost perfectly in line with global long- and short-term interest rates. So if US rates went back up, logically they would rise in parallel to global rates rising. I could be wrong, but my guess is unless we see a repeat of the gross monetary policy errors that ruled the 1970s, leading to global hyperinflation and ultra-high interest rates, we’re more likely to see a period of relatively benign rates for some time. Again, I could be wrong. Yes, rates likely will move higher than the historically low rates we’ve seen through 2009 and 2010. But that takes some time. Plus, as the economy grows, that shrinks our interest payments as a percentage of GDP.
Big debt isn’t some great thing, but interest costs aren’t the problem right now that so many fear—not something to go bonkers on immediately ahead. Scale it to see it right, and think globally—simple debunkery.
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