As the Federal Reserve raises its interest rates, the impact to the rest of the economy is yet to be determined. However, one area that will have a profound impact is the national debt at $30.5 trillion. The cost of borrowing money will become much more expensive. It is not just the increasing cost of personal borrowing that is impacted, but also the future impact on other programs such as Social Security and Medicare.
It is easy for the Congress over the last couple of years to borrow money when the given interest rate is near 0%. The national debt has exploded from $23.2 trillion at the start of the pandemic, to $30.5 trillion today – that is an increase of $22,121 per American over the last 30 months.
In 2021, the interest payments on the national debt were $303 billion. As interest rates rise, any new debt and debt that has to be refinanced must pay a much higher interest rate. That just means the U.S. Government has to pay more in interest and will have less money to pay out. It is widely expected to have interest payments on the debt to exceed $500 and even $600 billion annually.
The total revenue for the U.S. Government usually comes in around the mid $3 trillion annually. At 2021 levels, almost 10% of the budget covers the interest on the debt. With interest rates rising, the interest on the debt will be fast approaching 15% and closing in on 20% of the total revenue of the U.S. Government.
What does that mean?
It means the interest on the debt will be squeezing the federal budget even more at a much more rapid pace. It means that borrowing money, like has been over the last two and a half years, will be at a much greater cost. It really places limits on what can be done going forward. It could mean limits to future social security benefits and other government benefits that have been paid by the taxpayer.
As Congress has borrowed money at such a rapid pace, it means we as taxpayers will have to pay more and more in the future to pay for the interest on that debt. When there is more debt, there is less future purchasing power and less financial freedom. That is the real concern.