US May Have Its Own 'Balloon' Note

Monday, March 12, 2012 09:06
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US May Have Its Own 'Balloon' Note

Tags: economy | investing | U.S. debt

The federal deficit is projected to hit $11.58 trillion in 2012. So, what would the debt service on such a sum look like? Normally, it would carry at least a 5% or 6% interest rate, coming to around $5.5 billion in interest payments. That would have been the rate range way back in 2007…not really so long ago. At an artificially suppressed rate of 2 ¼ %, however, that interest amount looks more like $2.25 billion. The latter is about half what the government pays for Medicare; the former is almost 14% more.
 
Granted, the lower interest rate has helped the economic recovery in the short term. The reality is that anytime markets (including interest rates) are artificially controlled, an event of some type typically comes along to force things back into their cyclical balance. This is the way of market meltdowns. They are simply a brutal correction back to the natural market environment. Hence, the word ‘correction.’ As prices grow too frenetic to match fundamentals, more people buy into the ‘too good to be true’ syndrome and, sure enough, the correction validates the mantra.
 
High prices, however, are not the only way for a cycle to be artificially extended. In this case, the artificially low rates are having the same effect. With the debt level of the US Treasury at $10.7 trillion and over $5 trillion of it coming due over the next three years, US taxpayers could become the next bailout source. Only this time, the bailout of the bailout may result in a note the American people will be hard pressed to pay.

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Comments (3)

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skips303
We may have slipped a decimal point here. The deficit in 2012 will be about 1/10 of that listed in the first line here. And the debt level is quite a bit higher than the $10.7T listed in the last paragraph, when one considers all the debt owed by the Treasury to the Social Security recipients. It's closer to $15T. And I'm not sure how a 5% interest rate on $1T, or $11T, equates to $5B in interest payments. The math doesn't work.
skips303 , March 15, 2012
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lisagray
Thank you for your comment. The $10.7 trillion is the debt held by the US Treasury according to the Wall Street Journal article linked to this post. It also says the federal debt level will hit $11.58 trillion this year (2012). There was no mention of including what is owed to Social Security recipients. The actual interest payment on $11 trillion at 5% was listed as $535 billion.

Obviously, the interest rate now is not 5%. That's the rate it was in 2007, not so long ago. The point of the WSJ article was that the interest rate is artificially low and, therefore, cloaks the real exposure if rates rise back to normal levels.

lisagray , March 16, 2012
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lisagray
You also correctly noted my misuse of the word 'deficit.' US Treasury debt and the US trade deficit are two different things. Thank you for that correction.
lisagray , March 16, 2012

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