5% of 20 Trillion

The US federal government is 20 trillion dollars in debt. That means that it will have to pay a whopping 1 trillion dollars annually to pay interest alone, should interest rates go to 5%. That is more than one quarter of all federal tax revenue which currently stands at about 3.6 trillion per year.

So what will happen if interest rates were to return to their historic average of about 6%? Will there be a drastic cut in federal spending, will there be a drastic tax increase, or will the federal government simply borrow more money to cover their interest obligations?

Most likely, politicians will choose to borrow more. But who will lend them all this money? Will foreigners want to buy the debt issued by such an irresponsible government? Will US pension funds invest in this debt? Or will the Federal Reserve issue the money in direct exchange for US treasury bonds?

Foreigners are unlikely to continue buying US treasuries given the rather obvious fact that the US government has no plans to pay any of it back. Pension funds are about to reach a point where they will have to pay out more than they take in as the baby boomers go into retirement, so they will not be buying this debt either. It will only be the Federal Reserve that has both the will and capability to pay. The debt will in other words become monetized through money printing.

In return for treasury bonds, the Federal Reserve will print money. The value of the money will be based entirely on the value of the debt. But since the federal government is unlikely to pay back on its obligations with anything but even more borrowed money, the value of US treasury bonds will at some point go to zero. At that point the value of the US dollar will go to zero too.

By National Museum of American History - Image by Godot13, Public Domain, Link