The Interest rate on the debt is low and is that good?
The current interest rate that we, as tax payers, are paying is just under 2.4%. That rate seems to be more than fair given the rates on other securities, but just what does this mean?
First, let’s examine the reasons for this historically low rate. There are primarily two factors at work. The FED is making every effort to maintain artificially low rates in the US as compared to other countries with the idea that this will assist in stimulating the economy. Following is from the FED (http://en.wikipedia.org/wiki/Financial_crisis_of_2007%E2%80%9308):
“The financial crisis that began in 2007 was the most intense period of global financial strains since the Great Depression, and it led to a deep and prolonged global economic downturn. The Federal Reserve took extraordinary actions in response to the financial crisis to help stabilize the U.S. economy and financial system. These actions included reducing the level of short-term interest rates to near zero. In addition, to reduce longer-term interest rates and thus provide further support for the U.S. economy, the Federal Reserve purchased large quantities of longer-term Treasury securities and longer-term securities issued or guaranteed by government-sponsored agencies such as Fannie Mae or Freddie Mac. Low interest rates help households and businesses finance new spending and help support the prices of many other assets, such as stocks and houses.
By law, the Federal Reserve conducts monetary policy to achieve maximum employment, stable prices, and moderate long-term interest rates. Information indicates that economic activity is expanding at a moderate pace. Labor market conditions have improved, however, a range of labor market indicators suggests that underutilization of labor resources is gradually diminishing. At the same time, the Federal Open Market Committee judges that the likelihood of inflation running persistently below 2 percent has diminished somewhat since early this year, and survey-based measures of longer-term inflation expectations have remained stable.”
Unfortunately this strategy has, so far, not produced the desired result, the economy remains sluggish and in fact retail sales declined in the first quarter of 2015.
“US Retail Sales Decline For Third Straight Month
Source: http://finance.yahoo.com/news/us-retail-sales-decline-third-200557373.html Sales in U.S. retail and food stores unexpectedly decreased 0.6 percent from the previous month, following a 0.8 percent drop in January as cold weather kept consumers from shopping malls and car dealers. It was the first time since 2012 that sales had dropped for three consecutive months.”
Of course this result will demand that the FED continue to artificially depress interest rates.
Why do I say that the rate is artificial? Let’s examine a more stable economy with a modest growth rate and one that has a much lower per capita national debt. Here I use New Zealand as an example. It is difficult to find a short term rate at any US Bank over 1%, while the 120 day term rate for KIWI Bank as of the date of this writing is 4.4%!!
What would be the impact on the US taxpayer should the current interest rate double. The answer is that we would incur an additional $500 Billion in costs!