The country has racked up a lot of debt (maybe you've heard). But, thankfully, interest rates are at all-time lows. That's saved you, the taxpayer, a bundle. Even though the national debt has tripled in the last 18 years, the amount the government spends annually on interest payments has declined from $232 billion in 1995 to $222 billion today.
But what happens when interest rates rise?
What if they rise a lot?
What will that do to budget deficits?
The common answer is, with a $16 trillion national debt, rising interest rates will blow a hole in the budget deficit. This seems unshakably, arithmetically, true. And it probably is. I've written a warning about it several times.
But there's another side to the story I've been thinking about, and it quiets the doom-and-gloom narrative down quickly.
The nation's finances have been here before. Worse, even. In 1946, just after World War II, public debt stood at 109% of GDP, compared with 77% today. And short-term interest rates hovered around 0%, just as they do today.
But from 1945 to 1980, interest rates surged from 0% to more than 11%. This is exactly what we fear happening today.
What did this rate spike do to the country's interest-payment bill? From start to finish, basically nothing:
Put this all together, because it's important:
- National debt was much higher in 1945 than it is now (in relation to the size of the economy).
- From 1945 to 1980, interest rates rose from 0% to 11%.
- This did virtually nothing to the real cost of paying interest on the national debt.