Interest Rate Explosion

This looks like fun, but it won't be. I have been warning for some time that the US was facing a crisis because of debt service. The "buzz" on this is starting to reach the mainstream. I read an article on interest paid by the US government on Investor's Business Daily recommended by a Texas congressman. Right now the percentage of the budget spent on interest is under the danger point—18 %. The non-partisan (as you are always supposed to say) Congressional Budget Office, has estimated that it will be 20% in 2020. This assumes the US will have revenue growth due to economic growth, and that interest rates will remain low for the foreseeable future.

I have already predicted low interest rates and modest growth for a few years, a little breathing space. This is why I am guardedly pessimistic. We still have time to get our house in order. But based on the latest rhetoric from Obama this is almost a forlorn hope. The unwillingness of Republicans to cut their own sacred cows is part of the problem as well. 

Interest rates are not just low; interest rates are not just as low as they have been in recent memory; interest rates are as low as they have ever been in recorded history. Look at this list of interest rates to see what I mean. 

I am not out on a limb when I say that these rates cannot last. They were over ten times higher in the 80's. That would mean that interest rates would consume 200% of the budget in a few years if rates get that high. 

Let’s say interest rates are double the projections, not at all out of the question. This would mean that interest on the US debt would consume 40% of the budget in 2020. Based on the fact the budget borrows 40% of every dollar it spends, this would mean that paying interest on the debt would consume 2/3 of all tax revenues. 

Do I have to point out that this cannot happen? 

So look for more of the same from the educated idiots in power. Things will continue on as they are. It will look fine on the surface, until the dry rot causes the structure to collapse. I do not expect the whole building to fall over, but the US will have to live with a rotten floor for some time. But the floor can be repaired. 

Are you ready for the great stagflation of the next decade? If not, get ready. You have some time as the sucker's rally takes place over the next few years.