That Fed rate hikes mean for the national debt

That Fed rate hikes mean for the national debt
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There’s been a lot of talk about the negative impact that Federal Reserve rate hikes are having on stocks, bonds and more mortgages.

But we haven’t heard much about the adverse impact that the Fed’s higher interest rates, designed to curb inflation, are having on federal finances.

Think of it as 12-figure collateral damage. That’s right, worth 12 digits.

Why aren’t people discussing this? Because there isn’t a single place that has a number that shows how much the Fed’s rate hikes will contribute to federal interest rates.

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But with the help of the Treasury Department and Social Security actuaries, I’ve come up with a reasonable estimate of that additional interest cost. By my calculations, the higher Fed interest rates will increase the federal government’s interest costs by about $128 billion a year.

That may not sound like much given the trillions of dollars in fixed assets that have evaporated from higher Fed interest rates. Or given the $1.4 trillion deficit President Biden has proposed for this year.

But $128 billion is close to the total of $133 billion the Biden budget is targeting for the Departments of Energy, Homeland Security and Agriculture.

Or is only 2 billion dollars below the sum the Biden budget is set to spend on the Interior Department, Labor Department, Commerce Department, Treasury Department, Environmental Protection Agency, National Aeronautics and Space Administration, National Science Foundation, Social Security Administration and the Corps of Engineers. combined.

Let me show you where my additional Fed expense numbers are coming from.

As of March 31, about $23.88 trillion of the federal debt was so-called “public debt” held by investors, and another $6.52 trillion was “interstate” debt held primarily by federal trust funds were held.

According to information the Treasury Department gave to the Treasury Borrowing Advisory Committee — a group made up of representatives from about a dozen financial institutions including Goldman Sachs, JP Morgan and Vanguard — 29 percent of the government’s debt will need to be rolled over between March 31 and last March will be March 31, 2023. That leaves $6.93 trillion to be refinanced by issuing new debt, which finance types refer to as debt rollover.

Following the Fed’s latest rate hike, interest rates on a dozen different maturities of securities that the Treasury sells to raise money rose an average of 1.9 percentage points from their year-end levels. But to be careful, I’ve rounded that down to 1.75 percent.

With $6.93 trillion in government debt to be refinanced, that translates to about $121 billion in additional interest per year. Worth the aforementioned 12 digits.

No figure is available for intergovernmental debt due to rollover from past March 31 to March 31, 2023. That’s because more than 200 different government-related entities own these securities, each with their own books.

So I came up with an estimate by extrapolating from some numbers that Social Security actuaries had given me.

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The Social Security Old Age and Disability Trust funds collectively own $2.83 trillion in government bonds. That’s about 43 percent of total national debt.

The actuaries told me that about $175 billion of that would need to be rolled over from last March 31st to March 31st of next year.

If you extrapolate that $175 billion to the other 57 percent of the domestic debt, you get another $230 billion that needs to be refinanced. That makes a total of about 400 billion dollars.

Apply our 1.75 percent cost increase and you end up with about $7 billion in additional annual interest expense. That brings our total estimated Fed-related interest expense to about $128 billion per year. Which, remember, is a conservative number.

All of this adds up to the national debt that will ultimately be borne by us, our children, our grandchildren and generations yet to be born.

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