Fed Backed Into Corner as Interest Rate Increase Would Bankrupt Government

The U.S. government has been on a borrowing binge the past few years, fueled in part by low interest rates that make borrowing very inexpensive. The Great Recession began in December 2007, and at that time, the U.S. government was paying an average interest rate of 4.69 percent on its marketable securities. This is the rate on securities held by the public or foreign governments and not the rate on issues for programs like Social Security, which consist of special bonds designed specifically for that program.

After the Federal Reserve lowered short-term interest rates to near zero and bought more than $2 trillion worth of bonds to decrease long-term rates, the government is now paying an average rate of about 2.09 percent on $11.255 trillion worth of debt held by the public.

Interest payments would total more than $500 billion a year without the Fed’s actions to lower rates. By acting, the Fed has saved the government more than $290 billion this year in interest payments.

Of course, the government doesn’t really have the money to pay interest on any amount. It is all simply added to the deficit each year, and recent budgets have suffered $1 trillion shortfalls. In the current environment, no one would have noticed another $0.3 trillion added to an annual deficit that is incomprehensible to begin with.

For now, Fed Chairman Ben Bernanke has promised to give the government until at least 2015 to get ready for higher rates. Eventually rates will rise and the debt payments could become more than a rounding error in the federal budget. At that time, as crisis prevails, real cuts will be unavoidable. For now, the government is relying on the Fed to spend and borrow, but this is a game that can’t go on much longer.

Editor's Note: You Owe It to Yourself to Know What Obama and Bernanke Are Hiding From Americans