When the Federal Reserve pulls back from its $85-billion-a-month bond-buying program due to the improving economy, interest rates will rise from their artificially low levels. It’s not an option folks. The Fed has to pull-back or risk run-away inflation. And quite frankly, rates are going to eventually rise anyways no matter what the Fed does IMHO.
So why is this bad? Well, according to Wikipedia, the combined total public debt currently stands at $16.805 trillion and grows everyday. If rates rise to just 5%, that’s $840 billion at year!
Know what the US is expecting to take in in tax revenues this year? Just $2.712 trillion. Using my 5% interest calc, 31% of all tax receipts would go to interest! What if rates go up even further???
If you remember the financial crisis of 5 years ago, don’t forget it because despite all of the back-patting going on in Washington, in reality, they only kicked the can down the road. Have you heard much talk about paying down the debt? Nope. Have you ever tried to borrow your way out of debt troubles? It doesn’t work. Eventually you have to pay the piper. We as a nation are about to.
So what does this really mean to you and me? Well, either higher taxes or the US government will have to declare bankruptcy. The latter seems unlikely, and higher taxes will have a negative impact on the economy. It’s a vicious circle.
UPDATE:
Excellent related article Can the U.S. Go Bankrupt?