Debt and interest rates

By one measure the national debt has tripled during the last 15 years. Although there certainly is concern about this trend, there doesn’t seem to be a rush to deal with the issue. N.C. State University economist Mike Walden discusses why.

“Well, of course there are many reasons, and many of these are outside of economics having to do with politics, et cetera.

“But there is one financial reason why perhaps there’s not been a rush to deal with this, and that is that due to the fact that interest rates — and of course we use interest rates and we have to pay, federal government has to pay interest rates to finance that debt — … have fallen dramatically over the last 15 years, actually the carrying charges for the debt — even though the debt has gone up … (that is what we have to pay in interest on) the debt is actually slightly lower today as a percent of the budget than it was 15 years ago.

“So really we’ve been bailed out, in some sense, in terms of our national debt, and the rise in the national debt by the fact that, as that debt has gone up, interest rates have gone down. So we’re sort of in a sweet spot here where, yes, we have more debt.

“We can carry more debt and it’s really not costing much, but the big danger point, of course, is what happens when those interest rates start to turn around and go up, as many economists think they eventually will have to do? Then, then I think we’ll really begin to see attention focus dramatically on the national debt.”

 

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