The price of uncertainty
On mortgage rates, the Federal debt, and the cost of global uncertainty about what the US is going to do
For the last full budget year, the Federal government spent all $4.92 trillion it brought in, and borrowed an additional $1.83 trillion to cover spending over and above taxes and other revenues. All of the accumulated deficits, plus interest, bring us up to a total of $36.2 trillion in debt. It's a sum far too large for anyone to really comprehend -- even divided among a population of 341 million people, it's nearly $106,000 per person.
â– Changes to the rate of interest we pay on that debt are hugely consequential. And the interest rate on long-term loans to the US Treasury went from 4.42% on April 4th to 4.90% on April 11th.
â– It's hard to see that kind of a change -- an increase of more than 11% in a week -- outside of the context of disruption to the world trading economy in which it happened. Uncertainty is expensive, and there's no better place to see the cost of uncertainty than in the change in interest rates.
â– Comparisons from day to day or week to week might sometimes be misleading -- lots of factors affect supply and demand on a daily basis. But there are signs that confidence in the Treasury has taken a durable hit. Chances seem good that rates will still be elevated 90 or 180 days from now.
â– And if the prevailing uncertainty means we are going to pay interest rates on our debt that are half a percentage point higher (or more) than what we were paying before, then the pain is going to be around for a long time to come. Interest on the debt is already more than 10% of all Federal spending. Higher interest rates will make those costs larger.
â– Taken together, what we spend on priorities that really can't be cut (like Social Security, Medicare, and interest) amount to nearly half of our spending. This means we don't have a lot of options to soften the blow on the spending side. There's only one other side of the equation where change is possible, and that's on the revenue side: Higher taxes. And in an environment where higher government interest rates push up interest rates on private citizens, too, a lot of people will find themselves paying more, twice over.
