Interest on National Debt Becoming Uncle Sam’s Biggest Bill
The U.S. government borrows an average of $10 billion daily, which means the national debt increases by $1 trillion every 100 days. It is no secret that paying interest on the national debt has become the fastest-growing category of government spending during President Biden’s tenure. That’s the inevitable outcome of combining an oversized national debt with excessive spending and rising interest rates.
Already, the cost of paying the gross interest on the national debt exceeds $1 trillion—that’s just the cost of interest on the existing national debt. How big will that number grow when Uncle Sam borrows another $10 billion a day, every day through the rest of the year? Especially when the interest rates the government pays on the national debt won’t go down as early or by as much as expected?
Michael Hartnett is an investment strategist at Bank of America Global Research. In his weekly “Flow Show” note for investors, he ran a bearish scenario to answer these questions. Here are the main takeaways from his analysis.
- US government spending past 5 months = $2.7tn, up 9% YoY... on course for $6.7tn in FY24; US national debt rising $1tn every 100 days...set to hit $35tn in May ’24, $37tn by US election, $40tn in H2’25 (doubling in 8 years); spending up, deficits up (9% of GDP average past 4 years), debt up -> interest payments up = $1.1tn in past 12 months & set to rise by $150bn in next 100 days
- US Treasury has aggressively shifted refunding toward <1-year T-Bills ($21tn issuance past 12 months), lowering maturity of debt to ≈5 years, increasing sensitivity to short rates, incentivizing Fed to cut rates;
- Unchanged rates/yields & debt trend next 12 months & US refinancing rate is 4.4% & annual interest costs jump from $1.1tn to $1.6tn
How the fastest growing category of government spending becomes the biggest
According to President Biden’s budget proposal for the federal government’s 2025 fiscal year, Social Security is set to be the year’s biggest budget line item at $1.46 trillion. Should the cost of paying the interest on Uncle Sam’s national debt reach $1.6 trillion by the end of the year, it will become the biggest single line item in the U.S. government’s budget.
Hartnett’s bearish analysis presents a worst-case scenario by assuming 2024 may see no interest rate cuts. However, unless interest rates fall much faster than predicted, interest on the national debt will become Uncle Sam’s biggest budget expense sometime next year.
