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.