As Budget Deficit Hits Record High, Interest On US Public Debt Hits Record Low

Tyler Durden's picture

What is wrong with this picture: the MTS just announced that the February budget deficit was $220.9 billion, after receipts of just $107.5 billion with vastly surpassed by outlays of $328.4 billion. This is a record. Yet the interest on the public debt was a mere $16.9 billion (page 13 of the MTS report). The reason for this is because as TreasuryDirect points out, in February the interest on public marketable debt (actual cash outlays), which as of Monday stood at $8.061 trillion, hit an all time low of 2.548%. How is it possible that unprecedented debt accumulation can result in ever declining interest rates, and Treasury auctions, such as today's 10 Year reopening, in which the Bid To Cover hit an all time high? One answer: The Federal Reserve, which through complete domination of the entire capital market courtesy of ZIRP and QE has now turned market logic upside down by 180 degrees. In a normal world, the more money you borrow, the greater the associated risk, and the greater the interest payments on this debt. Not in America though. So can we assume that the Fed can forever keep rates on debt at record low levels? No. Which begs the question: what happens when interest rates do finally start going up?

Here is the relevant page highlighting the deficit. In a word: the US collects enough money organically (via taxes) to cover less than a third of its outlays.

A look at the distribution of receipt components should lead to questions about the sanity of anyone who claims that the budget trajectory is sustainable - in a word, tax revenues are plunging. Of course, this has to be evaluated in parallel with the observation that tax refunds in January and February of 2010 have actually surpassed those of 2009 as Zero Hedge discussed previously, explaining why consumers have shown abnormal resilience so far in 2010.

So even as the income side of the Federal ledger has rarely if ever been quite as bad, the expenditure side has exploded, and not as a function of debt funding: the bulk of outlays have to do with entitlement programs which came in over $160 billion, and which still could not have been covered organically.

Here is where debt comes in. We know that recently the debt ceiling was raised to $14.3 trillion which is expected to be hit in less than a year. Observant readers will recall that the previous ceiling of $12.4 trillion was supposed to last the US until the end of March - well, not only was this number passed over a week ago, it is now, less than half way into March at $12.5 trillion, which would have broken the debt ceiling far in advance of expectations. This leads us to believe that the $14.3 trillion ceiling will likely have to be raised once again and at a very critical time for the administration: around mid-term election time.

Yet if one were looking just at the interest rate paid by the government on the marketable debt portion of the public debt (which was $8.06 trillion as of most recently), it would appear that America's economy was cranking on all cylinders. Of course, this is not the case, and the rate is merely an indication of the Fed's direct intervention in all possible markets.

The chart below shows the absolute level of the interest on marketable debt, and the MoM % change. In February the rate came in at a record low 2.548%, a 1.8% decline from the 2.595% in March.

To be sure, this is expected with the Fed running a Zero Interest Rate Policy, and QE adding direct purchases by the Fed.

Yet what is notable is that even with the effective Fed Funds rate at zero for over a year, the rate on marketable debt has bottomed out, and the spread from FF to the Interest Rate has held constant at about 2.5%.

The primary reason for this is the duration distribution of US debt. The short-term portion has already reaped the benefits of issuance at or near 0%, while the longer-dated side of the curve is keeping rates higher. If indeed the Treasury is serious about extending the average maturity on public debt from 4 to 6 years, the new baseline for this spread will eventually be at about 3%, where it was earlier in the decade. 

Yet the logical next question is what happens when rates start going up? It was as recently as September 2007 that we had a interest rate on marketable debt of nearly 5%. The plunge to 2.5% took just over a year. Even the mere mention of actual tightening will spring rates right back to 5%. What does that mean for actual outlays. Well: if indeed we are correct that total debt will hit $14.3 trillion in less than a year, it means the marketable debt will be about $10 trillion, and the incremental 250 bps of interest will mean about $250 billion of additional interest outlays a year, or half a trillion annually. That comes to about $42 billion a month. In January this amount would have been double the net withheld income taxes.

It becomes obvious why the Fed simply can not allow rates to go up. It has nothing to do with excess liquidity, which of course is a major concern as America goes from one excess-liquidity bubble to another. The problem is that the surging budget, which will need ridiculous amounts of debt for funding, will truly explode if rates were to go up merely to 5%. What happens if rates hit 7.5%... or 10%? At that point it is game over. And that sad ending will occur once the Fed and the administration realize that all ongoing efforts to kick start a consumption driven economy will fail. In the meantime, the economy will slowly grind to a halt as the servicing of public debt takes over a greater and greater portion of all tax receipts, until all taxpayer money is used merely to cover the interest expense. At that point buying CDS on the US denominated in euros, dollars, gold, .556, watermelons, or what have you, will be completely pointless as the bankruptcy of the US will be entirely priced in.

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trav7777's picture

There is no competition among borrowers for access to capital, thus, rates can't go up.

NOBODY is borrowing except the USG...and I guess they are borrowing from the ONLY lender, the Fed.  So, they get a real good rate

mikla's picture

Yep:  Indirect bidders at 100%, yet again!  Yay!  (Pay the man, Feddie!)

Amazing how every bond auction goes just *swimmingly*, especially since the numbers this year will be greater than the amount of available dollars this year across the whole planet.

$1T-$2T held by the Chinese, accumulated over decades?  Bah!  We can print that in eight months!

Still, everyone should see that this article merely reflects yet another example of how we will see this take form in a SUDDEN STOP.  The Rubicon was miles ago, the point-of-no-return was long ago, and I'm amazed general discussions by "experts" still want to qualify their statements with "if things don't change..." or "if we continue on this path..." or "what could happen is...".

Gimme a break.  The patient is dead, and we're merely waiting for one of the doctors in the room to grow a pair and call the time of death.

Cognitive Dissonance's picture

This is the grand deception, the illusion. Everyone has piled into one life boat and it's sinking. We are told through the propaganda machine that there are only two choices. We can declare it a hopeless cause and everyone tries to bail out at the same time. This means everyone gets extremely wet and many die, including some of those who hold the power. Not a good choice because we've been convinced that we must save the elite, that our lives depend upon the elite. If the big banks fail, the world ends.

Or we can declare things are getting better, thus allowing the elite to arrange for alternative transportation. Then they will come back and save us. Of course, all this really does is allow us to live a few more days in our denial, blessed with the false hope that survival is just a few oar strokes away. Without hope, we can't survive. This has been conditioned into us rats and now we believe it. This is why we ask Daddy if everything will be alright, knowing that Daddy is just telling us what we want to hear. Tell me a lie and I'll pretend it's the truth.

Of course there are many more choices available than the two outlined above. But the two above are the only two that are presented to the masses because they allow the elite to get away first, with all their and our luggage as well. And we have been conditioned for thousands of years to do as we are told. This is an old script brought up to date with the latest release, version 2010.3

Careless Whisper's picture

well now the Fed has to deal with graffiti artists.

ny graffiti artist tags fed with "audit me" :



Rick64's picture

Thats the first good news I've seen in a long time.

merehuman's picture

seed of rebellion, shadow hero.

Man of the moment, sheep by day

what will happen when the interest rises?

If you have to ask , you cant afford it.

Laugh in peace.

Anonymous's picture

Excellent post on O-Team propaganda by Yves Smith on Naked Capitalism:

Anonymous's picture

Thats exactly right Mikla, the time for if's are over. I know of no country that can continue to buy our debt for this amount of interest. I bet even the ones bidding directly are doing so because the govt. guaranteed them money/backing. And the indirect is what's left which is done from overseas (Cayman island) front companies ran by the fed. This is to make sure that every bond sale doesn't fail. Imagine every other week being country A or B buying 10 to 15 billion dollars in US treasuries. Why don't they use that money and save it in their country and buy their own debt. It's because the majority of the debt being bought from the US is being bought by the US.

The patient is dead, and everybody knows it except the patient and he doesn't care because he's acting as if he's alive and still a viable country financially and hasn't figured out that they are broke. It's in the best interest for the rest of the world to make believe that the king is alive and has clothes on. Because when the hammer finally comes down the other countries want to have a system set up that will, believe it or not have the US cut out of it. In the US they complain about other countries not being more open in their financial dealings and business but look at what we have done for the past 3 years. We have been so Opaque that we might as well be a third world banana republic financially.

Anonymous's picture

This is how the game continues: The FED is going to make the debt disappear!

FLETCH's picture

Modern Economic Policy= Realizing Political Goals. If you're not getting what you want, change the rules.  Forget prior commitments/contracts.  All done in the name of "world improvement" but really for power.

Worrying about how Bondzilla will manifest itself is pointless as the rules will be changed, bet on it.

The gov't issues the chips, we play with them.  If it's not working, more chips are issued, prior commitments ignored.  There is no justice when the gov't controls the game.  We all  just need to get over it.

Wealth and commitments are a transient concept to the political class.

Stranger's picture

As someone pointed out to me before, the banks have a cost of capital of 0% (they can print money to buy assets) and if their money printing ever causes problems they can borrow from the Fed at under 1%.

Now if the banks are getting this nice little perk from the government, it's only normal that they would kickback the benefits to the government. At worse the Fed will just buy all the debt, so the risk of default on these bonds is zero.

Anonymous's picture

Exactly right. The fed has created such an incredible glut of dollars that supply has swamped demand. It's like the interest rate on dirt, 0%. Now, the peasants would like to get their grubby little hand on some of that free money, but that's not the way our current form of capitalism works.

deadhead's picture

Tyler, Tyler, Tyler....interest rates WON'T go up because Ben Bernanke said they won't.

see how easy this is?


seriously, thanks for this piece.  Mr. Minsky must be licking his chops.......


and, for the record, Bernanke is a smug academic who thinks he can manage his way out of several hundred years of economic and financial history.   it is plainly obvious that his tactics to date have failed, both on a pre LEH basis and a post LEH basis.


ZerOhead's picture

DH... Bernanke knows there is no exit strategy but must 'pretend' that there is to buy time and avoid the end game from occuring before his friends have properly positioned themselves to maximize their financial gains from the pending collapse.

In the meantime... let's keep the party going!

Vintage AC/DC... Highway to Hell!

deadhead's picture

great vid!  I love son has a very similar guitar that i got for him.....64 Gibson SG special with one original p 90 and a modified humbucker, which is a PAF (the PAF is worth more than i paid for the guitar!)..... a professional guitarist (in the grateful dead scene) has played it in concert (he helped my son pick it out) and always kids me how he wishes he had bought it instead.

Postal's picture

I'm so glad I started stocking up on disaster supplies.

merehuman's picture

I stocked up. never before opened quaker oats and cup o noodles both had flying insects come outa the freshly opened box. SURPRISE! Had a can of campbells noodle soup recently that smelled so bad ..tossed. FDA asleep like the rest of the mammoth government

Anonymous's picture


Please be sure to rotate out grains and flour products periodically. I'm unsure of the ingredients in "cup o noodles," however nearly all uncooked grain and flour products contain insect eggs. It's unavoidable and they will eventually hatch even in a sealed environment. Freezing your stored supplies will help slow the process, but your best bet is to rotate your supplies on a consistent - say six month - cycle. FIFO and all that. But really, in a flat-out survival situation, those bugs are solid edible protein and will not harm you.

As for the canned goods, it's for the reason you mention that one is best off buying small portions. While the risk is small that you will find a "bad can," relatively, it is a much smaller problem to be forced to discard one serving of ravioli versus a large can that you were counting on for 10 servings.

Just my $0.02, adjusted for inflation.

rubearish10's picture

Uh,,, when rates go up, the deficit goes up?? Ding! Ding! Ding!


But wait,,,,if deficit goes up, then stocks go up, that's it!

SV's picture


In a normal world, the more money you borrow, the greater the associated risk, and the greater the interest payments on this debt. Not in America though. So can we assume that the Fed can forever keep rates on debt at record low levels? No. Which begs the question: what happens when interest rates do finally start going up?

One word: Dodonpa


jeb3's picture

Another (two):  Kingda Ka

SV's picture

I was thinking in terms of acceleration force.  It still has the highest launch acceleration at 2.7 G.

jc125d's picture

Q: what happens when interest rates do finally start going up?

A: Mr. Chinaman say you cannot pay debt, so time for debt / equity swap, we want Iowa, all your shipyards and national parks and drilling rights all over. So sorry.

Ned Zeppelin's picture

Q.  That's nice, Mr. Chinaman.  I couldn't help but notice, though, that your debt is unsecured.

A.  But . . . you promise, it says right here "Full Faith And Credit..."

Q.  He, he he. . . yes, so it does.  Heh, he he.  So it does. How about that? Huh.  You got us there.  But . . . like I said, it seems to me you have a teeney, weeney . . .

A. What?

Q.  Problem.  Let me put this in terms you will understand: no tickee, no laundry? Comprende? SOL, no good, bad outcome, sorry, get lost. That type of thing. 

A.  Ohhh. . . .

jc125d's picture

That not so happy news. Ok no returns on any special product like poison fish, antifreeze toothpaste, formaldehyde pickles, lead paint toy and some very special surprise you find out about later, how you like that. Plus no more dollars only gold and that food you ate at Golden Noodle, it wasn't chicken.

Anonymous's picture

Mr. Mexico: You say chinaman no want dollaros? I make you random junk, cheaper price cause I no need ocean shipping...

deadhead's picture

I'll take care of that phucking Mr. Chinaman in the congressional showers if he phucks with what I want.



35Pete's picture

Israel: Not so fast Rahm. How does China affect us? Now, about nuking Iran...

Rahm: But daddy....

Israel: Back to your office Rahm or they'll be no chicken soup for you!

merehuman's picture

Of course, the Chinese "losing face" in such a major way....will have to respond. As it turns out they have way too many single men and a half ass recovery, plus they have stocked up and have the mechanization to supply their military.

We on the other hand need said war to confuse the issue and get rid of "useless non consumers" . The poor and jobless will be quick to fill the ranks to do their "patriotic duty" while earning a dime not possible in the current job market.

The Elite who started this will be fine. To them this is nothing more than a harvest.

WaterWings's picture

I need more 7.62 in that case.

Anonymous's picture

China: Ok, we sell debt on open market. We take loss, no big deal. Crash bond prices, raise US interest Rates. U.S. borrowing costs skyrocket. Who finances your borrowing needs? Who has weeny up their ass now?
U.S.: On second thought...

Anonymous's picture

Come and get it..

blindfaith's picture

if they won't take California, then give them Texas ( they want to susceed from the Union anyway).  What the heck you can't take ten cents out of China or any equipment you bring in to start a about have it your way.  Which make me wonder about the "profits" these mulitnational (aka American) companies claim...just where do they spend those "profits"?

john_connor's picture

"Which begs the question: what happens when interest rates do finally start going up?"

The Fed and US go bankrupt.

deadhead's picture

i just hope i don't die before that shit hits the fan.....can you imagine what it will be like?

Anonymous's picture

Sorry but I think you will wish you were dead. It will be worse than Auschwitz.

Anonymous's picture

No. It will not be worse than Auschwitz.

assumptionblindness's picture

Rates are not going up...never ever ever ever ever!

- The Market

AR15AU's picture

If you have not already done so, please speak with your HR department about filling out a new W-4 form.  Take the new form and add an extra 2 allowances.  If we all do this, the government intervention will end abruptly, the reset button will be pressed, and despite some short term drama, the economy will be on its way to getting back on track.

john_connor's picture

you can claim 9 without an explanation.

Anonymous's picture

Most places that I have worked, you just put a "block" on the tax, and specify a predetermined amount to be withheld every check. It's easier than working with exemptions, and it stops the nonsense of jurisdictions revising the exemption schedule, so that you pay more in taxes than you owe, and sooner. Oh, they promise to issue you a refund at the end of the year, but....

HelluvaEngineer's picture

Also, I suggest you click on the California bond banner ad every time it is displayed.

deadhead's picture

i'll do it if i ever get a job.

out since April 2008. yikes!!


Anonymous's picture

Aah. Were it only so simple. Where is it written that all we'll need is a long weekend?? Short-term drama?? Live near/in a city?? This will not/cannot end well.

Half of us collect a check from the feds now. Once it ends it will never be able to be restarted--which leaves half the populace desperate and angry and hungry in a week.

My money is on the two or three day crash accompanied by closures and a sort of universal default that chains from the trading desks on wall street to the ATM on the corner.
The universal margin call from the last volatility spike.

All paper will initially go to zero. Think about it. Everything financial gets closed: ATM's, banks, brokers, exchanges. All paper denominated in fiat currency becomes worthless. Money Heaven. A neutron bomb. Yesterday you were rich or comfortable--today you're a peasant with only what you have in your house.

With local variations on a theme this will play out worldwide. Instantly. They'll probably shut down the media. Here comes Homeland Security.

There is only one question. Will the people get bamboozled into more fiat/marxism/control--or will we take it back? Real money, sales tax, 19th century fed govt size and functions. The tea parties are a good sign but hungry people go for strong leaders. It don't look good.

Oh, and the reset may start at 90% unemployment and take decades. We believe the propaganda now--will we suddenly get less gullible?


hedgeless_horseman's picture

In a word: the US collects enough money organically (via taxes) to cover less than a third of its outlays.

Keeping up with the Uncle: If my salary is $250,000/yr, then I should be spending more than $750,000/yr and borrowing the $500,000 difference.  AAA credit rating here I come!

Agent P's picture

Wait a minute...honey, is that you? 

aint no fortunate son's picture

Oh, I wouldn't worry about it. Something always turns up when you need it... I'm sure this time will be no different. Does anybody know who the favorite is to win American Idol?