Think you are debt free? Think again; You OWE $44,500 (and growing) – How “The Bernank” isn’t helping...

While the US government continues to spend, US citizens should prepare for a gut check on what you owe to the national debt. You currently owe $44,500; a family of four owes $176,000. Guess what, your portion is not decreasing either. Perhaps the next few charts can help visualize where you stand. The first chart shows the Yearly Average of the 10-year versus what the US government paid in interest costs year over year. While rates peaked in the 80’s, understandably, the government financing cost nearly doubled. This chart also displays that Governmental borrowing costs have gone down to the lowest since WWII.

The next chart shows the total debt for the US in billions (13.8 trillion and rising; meh, the trajectory isn’t worrisome):

These two charts show that US debt has risen exponentially, while the borrowing cost has decreased to generational lows. The next chart displays the actual interest payments on the US debt per year since 1944.

Although debt has ballooned to nearly $14 trillion, our payments to the debt have not ballooned as well. How did this happen and how do I get a deal like that?



Essentially, our country went subprime and only cared about the monthly payment. While our debt increases rapidly, we kept refinancing at lower rates. How can that be? Quite simply, we refinance at shorter maturities with lower yields (hat tip to Easy Al Greenspan and “The Bernank”).



Wait a minute - you mean while rates are at the lowest since the post WWII “buy bonds” campaign, we are taking out an adjustable 1-year ARM when we could get a 30-year fixed? Yep, because we cannot afford the fixed rate, consider the following table from the high interest rates of the ‘80s until present day:

In the last 12 months, we paid roughly $197 billion in interest on our $13.8 trillion debt – which works out to an interest rate of around 1.42%. Pretty swell, huh!

What would happen if we financed at a more normal rate? Let’s consult the following chart to compare 20 years ago and the rates then (available from Treasury.gov):

If we use our math example – we can see that our 1.42% interest roughly equates to the current 3-5 year timeframe. “The Bernank” is essentially giving the US debt a 3-year ARM (it’s all about the monthly payments baby). Compare the 3-5 year rate back in the 90’s – around 7%. Ouch. Think of your mortgage going from 1.42 to 7% . Nw you know how Greece feels.



What about the interest cost if we rolled up the curve to get our “fixed” rate for a longer duration? At $13.8 trillion and a BALANCED BUDGET (no deficits), moving all the way to 30 years at 4.5% provides a healthy yearly stipend of around $650 billion (roughly 20% of budget and 1⁄2 of total discretionary spending). This last chart shows where the interest cost would be if we had to refinance at previous year interest rates. Thanks “Bernank” – way to take advantage of the low rates!



