Rising Interest Rates Increase US Debt Payments

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5 min
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As the team's Capital Markets Analyst, Jacob conducts market and investment research and assists in the development of business strategy to serve our clients more effectively.
January 31, 2023

It comes as no surprise that as interest rates rise so do interest payments. What we are looking at is the US’s interest payments, the effective federal funds rate, and total public debt in the US.

Somewhere around a third of all public debt in the US is issued as short term debt, meaning the debt issued matures in less than 5 years, with some to a lot maturing in one month to a year.

In 2020 the US government issued trillions of dollars in new debt to help stimulate the economy, but it was all borrowed at low interest rates.

Now three years later and at 4% higher interest rates that debt must be converted into more debt. The US government does not pay off it’s debt, at least not all of it, it just borrows more to pay off the old debt holders.

That’s not good thing but it’s also not a bad thing. In order to maintain reserve currency status the US government must constantly create demand for its currency, and it does that in the form of debt.

Every piece of debt is an asset on someone’s balance sheet and a liability on another.

When everyone in the world wants to hold debt denominated in US dollars it creates demand for US dollars, which holds the dollar as the reserve currency of the world. But you must keep creating debt to maintain that status.

If the US started paying off its debt, it would no longer be the reserve currency of the world. Countries, institutions, and people would start buying the debt denominated in other currencies because US debt isn’t being issued.

It’s also not great to issue massive amounts of new debt.

The UK once held the status of the reserve currency of the world, but during WWII it raised so much debt that it eventually could not issue more debt and continue to make payments on that debt.

The UK did not default, but because it did not have the capacity to issue new debt, it lost the reserve currency status to the US.

(It’s important to note that even though the pound is not the reserve currency, it still is one of the most widely held currencies in the world, and the UK markets are broadly strong.)

This all comes to the US debt ceiling.

The debt ceiling is a tool that is used by the government to disincentivize short term blowouts of debt, or that’s what it should be used for.

It should always be raised, but it shouldn’t be hit again quickly, because of the situation that happened in the UK.

Now that interest payments are rising the debt ceiling is more of an issue and the future of the federal budget is more of an issue.

Using debt effectively is the best way to continue growth and service future debt here in the US for generations to come.

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