Tuesday, February 23, 2010

Does the Debt Matter? – Alternate Projections

In my earlier post "Does the Debt Matter? - Government Projections" I described how federal interest payments might be affected by an historical range of interest rates (from 2.0% to 14.0%) applied to the federal debt as currently projected by the Obama administration.

The Obama administration projections assume substantial growth in tax revenues averaging 12.5% each year for 2011 through 2014 and reductions in the growth of federal spending such that spending growth averages 2.9% over the same period. For the years 2001 through 2007, year over year actual increases in tax revenues averaged 3.7%. Average annual increases in federal spending were 6.2%.


The years 2001 through 2007 start during the “dot com” recession and end with the peak year just before the start of the current recession. They were not our country’s best years and they were not our worst. They were in fact typical; enough so that using their average figures as a guide seems reasonable.

If the 2001-2007 average spending increases and average revenue increases are projected into 2011 through 2014 you get the results shown below – a 2014 end of year federal debt of $21,276,966,800,464 ($21.3 trillion)


Using these projections of revenue and spending and therefore of 2014 debt; then applying the same range of historical interest rates we see the potential problem.


Under these conditions the interest payments consume the entire federal revenue at an interest rate of about 11.8%. Ten-Year Treasury Bonds exceeded this rate in 1981, 1982 and in 1984. We also approached it in 1980 and in 1983; and, we were over 10% in 1985.

Could it happen again? You bet your bootees it could

Quote of the Day
“Government's view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.”
Ronald Reagan (1911 – 2004)

Link to Other Topics in the Special Report: Does the Debt Matter?

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