Peter Schiff, here:
The current national debt is about $16 trillion (this is just the funded portion...the unfunded liabilities of the Treasury are much, much larger). The only reason the United States is able to service this staggering level of debt is that the currently low interest rate on government debt (now below 2 per cent) keeps debt service payments to a relatively manageable $300 billion per year.
First of all, interest payments on the debt haven't been close to $300 billion a year since 1994. They've been above that level ever since 1994, and frequently way above that level.
In fact, interest payments on the debt have been above $400 billion each year from 2006 inclusive, except for 2009. This is important in the context of a Republican House which congratulates itself endlessly for a one-time spending cut of $38 billion.
Secondly, if we were really paying an effective 2 percent interest rate to service the debt, say in 2011, our interest payment that year would have been closer to $296 billion.
But the total US public debt at the end of the 2011 fiscal year reached almost $14.8 trillion, and interest payments on that debt were actually $454 billion, implying an interest rate in excess of 3 percent, half again as high.
That's the real lesson of rising interest rates. A 50 percent rise in interest rates from 2 percent to 3 on a pile of debt that size means an increased interest expense of $158 billion. People who think rates can't rise that much very quickly haven't been paying attention to the recent experiences of Greece, Spain and Italy. For example in Spain interest rates paid on 10yr paper lept 50 percent in six months' time this year.
In Italy they lept over 35 percent in five months' time.
Third, while Peter Schiff is surely right when he warns that rising interest rates threaten to consume government revenues, leaving nothing for essential services, the sorry truth is that our interest payments on the public debt are really more like the interest-only payments on loans people took out during the housing bubble. Those loans were DESIGNED never to require principal payments, and so the buyers of those homes never built any real equity and never were on a path to retiring those debts. That's our federal government. We NEVER make principal payments on the money we borrow, and we effectively borrow the money we need to make the interest payments, and then some.
Instead of paying $454 billion a year in interest-only payments on the national debt, we should be on a path to retiring that debt. At 3.5 percent interest for 30 years, that would mean interest AND principal payments together totaling $864 billion a year, not $454 billion. And it would also mean: NO MORE BORROWING.
Can you imagine such an America? Of $2.8 trillion in current revenues, that would leave just $1.9 trillion for the feds to spend, 50 percent less than the $3.8 trillion and climbing which they spend now.
If there were any real conservatives in America, let alone in the Republican Party, that's what they'd be telling the American people. Anyone who tells you otherwise is just a pretender.
