Interest on the national debt was $251 billion in fiscal year 2011. The exact amount that will be paid this year is now unknown but it appears that the average interest rate paid will probably be 2 percent or less. If it were not for low rates, the government yearly deficit would be much greater than is now the case. Yet these low rates hurt savers who rely heavily on interest income for support.
The absurdly low interest rates that we are now experiencing have been purposely caused by Federal Reserve policies that include, but are not limited to, quantitative easing, which is unwise in my view, but that’s another topic. The Fed’s plan is to keep interest rates at these extremely low levels for several years, their motive being to encourage people to borrow and spend more. They think that this increased spending will create jobs and get us out of our current hole. But on that I must respectfully disagree. After all, isn’t excess borrowing a significant cause of our nation’s current economic dilemma?
Years ago I purchased U.S. Treasury bonds that paid 8 percent interest and had a maturity date five years out. Beware! Those high rates may become the norm again. If our government’s present debt level is ever forced to be refinanced at an 8 percent interest rate, the result would be to at least quadruple the interest total now being paid. At 8 percent, our nation’s yearly interest bill could exceed $1 trillion. That’s more than is spent now on either Social Security or the combination of Medicare and Medicaid.
Our federal government often rescues itself from disaster by “printing money.” They don’t do this by printing $100 bills, but how it's done is too detailed to be explained here.
Interesting is the fact that state and local governments can’t rescue themselves by printing money. The only way they can keep from going under when expenses exceed income is by borrowing money or raising taxes. In many cases, limits have been reached in those areas.
Growing numbers of municipalities have declared bankruptcy. Generous pension plans and guaranteed, government-paid health care for life promises that haven’t been pre-funded are at the root of most problems. Now the time has come for these governmental units to pay the piper. The bad judgments and unreasonable promises made years ago are catching up. The federal government has the same unfunded pension problems as do the state and locals, but so far that fact has received much less publicity in news reports.