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Guest Post: By 2020 Interest Payments Will Be Greater Than The Budget Deficit

Tyler Durden's picture


Submitted by Peter Tchir of TF Market Advisors

Debt Service Is Growing Rapidly and Will Dwarf other Budget Line Items

Asides from the fact that I don’t see how people can believe the deficit doesn’t matter, let’s take a quick look at the facts that show it does matter.  Massively!

Put most simply, in 2010, for every $1 of discretionary spending we spend $0.15 on interest.  By 2020, for every $1 of discretionary spending we will be spending $0.50 on net interest payments.

No matter what your opinion you have on government spending, it has to be scary that the amount we pay on debt service is growing and risks overtaking the amount we spend on things we (allegedly) want.  Or what we (allegedly) need since it’s a similar story when compared with Mandatory spending.  The CBO expects both Mandatory and Discretionary spending to remain relatively stable, but that debt service will grow from just over 1% of GDP to over 3% by 2020.

Net interest payments will take up a disproportionate amount of the budget.  Spending money on debt service is ultimately a waste and will severely limit what the government can do in the future as debt service swamps almost all other line items.

The CBO numbers are disturbing enough, but they are too optimistic!

The CBO makes it clear how we get there, and what scares me even more, is that their assumptions seem optimistic.

Here are the current Congressional Budget Office projections for the deficit:

Year  2009A  2010  2011  2012  2013  2014  2015  2016  2017  2018  2019  2020 
Annual Deficit                           -1,413 -1,342 -1,066 -655 -525 -438 -507 -585 -579 -562 -634 -685


So the CBO has the annual deficit gradually declining until 2014 and then rising steadily until 2020. 

This is based on multiple assumptions, but at least a few stand out as optimistic, if not outright fantasy. 

They assume that the tax cuts expire as scheduled.  Possible, but I think last year’s tax cut ‘compromise’ showed us just how difficult it is to let tax cuts expire.  So a big part of the drop off in the annual deficit is a result of revenue increases coming from the tax cuts expiring.  This just seems unrealistic.

They also assume that all planned spending ends when it is scheduled to expire.  I’d like to believe that there is enough concern over the budget in Washington that this assumption is reasonable, but again, history tells us that Washington has a lot of trouble letting spending expire as schedule.  And it’s not ancient history, it’s the events of the past few weeks that confirm Washington is reluctant to cut anything or let spending expire.

They also have GDP growing at an average rate of 4.5%.  This includes GDP growth of 6% in 2013 and 6.3% in 2014.  Really?  This is nominal GDP growth, so maybe they have high inflation expectations.  The rate does match the longer term average rate.  So maybe its reasonable?  On the other hand, recent GDP is much lower and that is with massive stimulus, incredibly low rates, and QE2.  Maybe they are right on the long term GDP growth, but it does seem more of an optimistic case, than a base case.

The CBO did not enforce the debt ceiling in their analysis.  I guess even they know that is just a game and will never be enforced.

So we have 3 dubious assumptions all of which make the budget deficit projections look better than it is likely to.  But that is not the point, the point is what is the impact of interest on our cumulative debt?

In fact, with GDP growing, tax revenues increasing, and spending only growing moderately, what is driving the budget deficit projections?  It’s the interest payments!

By 2020 Interest Payments will be greater than the budget deficit!

In 2020 the CBO estimates net interest payments of $778 billion.  They estimate the deficit to be $685 billion.  Our whole deficit will be a result of the interest on accumulated debt.  That seems crazy.  Net Interest paid is $202 billion in 2010 and $778 billion in 2020.  Sadly that is a growth rate I can believe. 

The raw numbers are even worse, but we subtract from interest, the amounts going to Social Security and other trusts.  That would make more sense if we believed that the expense side of social security was actually being properly accounted for.  The raw numbers for 2020 are $375 billion higher.  I think the net interest number is bad enough, and maybe the inter governmental interest is being accounted for appropriately, so I will ignore it, but in the back of my mind I can’t help but be a bit suspicious that there are some more additional tricks being played here to make future deficits looks better.

I was pleasantly surprised that the interest rate assumptions used by the CBO seemed somewhat realistic.  They have t-bills going from under 1% today, to 5% by 2020.  The 10 year goes from 5% to 5.9% over that same time frame.  I don’t have a full breakout of what breakout they use between long and short term funding, but at least the levels seem reasonable and consistent with their nominal GDP growth assumptions. 

On interest rates, they should include some stress tests.  As it grows to be such a large line item, shifts in rates become exponentially more important.  How bad does it get if rates are another 1% higher than this?  2%? 

We have gone past the point of the deficit doesn’t matter thinking.  Ignoring the impact of growing debt service is short sighted, irresponsible, and downright dangerous.  The cumulative debt is a problem, and debt service will be the single biggest budget line item.  That cannot be fair to future generations.  We need to attack the deficit become the cost of carrying prior deficits is too high, and the in meantime we have to manage our exposure to interest rates and hedge as much as possible and future possible shocks until the problem is under control.


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Thu, 04/14/2011 - 16:44 | 1170253 Dan The Man
Dan The Man's picture


$42 slv...nuff said

Thu, 04/14/2011 - 16:51 | 1170288 camaro68ss
camaro68ss's picture

Sorry children and grand children for making you slaves to my fathers debts. hey it was fun while it lasted though right? o you would not know, you were not there.

Thu, 04/14/2011 - 17:22 | 1170408 ConfederateH
ConfederateH's picture

The slavery won't come through debts, they can easily be defaulted upon.  Slavery will come through capitulation to centrist and globalist elitism.

Thu, 04/14/2011 - 20:23 | 1170908 jmc8888
jmc8888's picture

Exactly.  The debts can be called fraud and cancelled (Glass-Steagall)

Even if the fraudulent debt, wasn't fraudulent, which isn't the case with the U.S.A. as it is fraudulent, you can always default.

It's the people who are idiots by saying

a) pay off fraudulent debt (printing, austerity, doesn't matter, you're setting horrible policy for fraud)

b) pay off huge debts that are unpaybale by failing to realize that when debts get too big, default is an option

We don't even need to do 'B', because the big banksters got us in hock through 'A'.

I don't see Barack saying this, I don't see Boehner saying this, and I don't see the corporate tea party saying this. Hint all three sides are controlled ultimately by the same banksteriffic side.  Paul Ryan's fascist corporatist plan is unreal and idiotic.  The Tea party wants to stand behind that POS, 'completely misses the boat' plan? 

Glass-STeagall and/or default...after all, it's all pretty much FRAUD.

Hamiltonian System using real American dollars, not an Fraudulent Debt Based Imperial monetary system using a foreign corporation's federal reserve notes.

If the #1 thing in someone's 'plan' isn't getting rid of the fraud through Glass-Steagall or default, then they don't have a fucking plan.

Who wants to pay for fraud through blood or debasement? Apparently Dems, repubs, and tea party.  All completely clueless. 

Glass-Steagall is the key and it will lock up the fraudulent debt and financial products, for good.

Thu, 04/14/2011 - 20:23 | 1170904 BlackholeDivestment
BlackholeDivestment's picture

A perfect scene from 1985 ''The Breakfast Club'', sums it up well. (go to 02:39 mark in the scene) ...''don't count on it'' is about right and this is the time of reckoning.

  The movie and the theme of the 80's ''Wall Street'' crowd that has turned 2012 into economic hell for their kids and grandchildren >>>

The numbers are just pathetic. America looks like what it is, a pathetic bunch of pimp'd out whores and liars found wanting. The writing is on the wall, just as it was in Babylon and in the Days of Noah, so is it with this generation, never to see and end to the self devouring deficit beast their whole laboring life.

Thu, 04/14/2011 - 23:52 | 1171365 PD Quig
PD Quig's picture

Projecting this shit past 2013-14 is just so much Excel-based analytical masturbation. Interest payments will never get that high. The whole fucking enchilada will be splattered all over the inside of the microwave long before that happens. And the next generation(s) will be living off this generation...that is, they will be keeping us locked in the cellar and eating our soft organs. And we will deserve it.


Thu, 04/14/2011 - 16:47 | 1170257 Dan The Man
Dan The Man's picture

While I'm here...Can the US default on the debt they owe themselves?  And not affect the rest of it?  Will they try anyway?

Thu, 04/14/2011 - 17:17 | 1170390 equity_momo
equity_momo's picture

Thats an interesting question. The Fed are the largest holder of US debt. Theyre a "private" institution. Theyre not very popular. Theyre owned by Wall St.

I think the idea of a US govn default on Fed Reserve treasury paper is worth exploring the consequences. Clearly Wall St blows up.  I dont see the problem in that - i didnt buy the Mad Max scenario in 2008 and i dont buy it now. Mad Max happens if we have hyperinflationary currency collapse though....


Thu, 04/14/2011 - 17:35 | 1170453 Cole Younger
Cole Younger's picture

Hyperinflationary scenario is already in place as we are the world reserve currency. The money is out there...its printed....If the world stops using it, it hyperinflate without having to print one more dollar. A default of any kind (even to the fed) would cause a mass exodus away from the dollar. It would collapse overnight and automatically hyperinflate. For every $100.00 dollar bill that lives in the U.S., 5 live abroad.

Thu, 04/14/2011 - 17:51 | 1170505 equity_momo
equity_momo's picture

Sure, i see the faith and trust aspect - afterall , thats all fiat is.  But a ring-fenced default on Federal Reserve held debt only? Im playing devils advocate - it would only shake what little faith i have left in the USD but im thinking of what options we honestly have. None of them are pretty.

Thu, 04/14/2011 - 17:32 | 1170444 gabeh73
gabeh73's picture

Default ALL of it. Should the Eypgptian people be taxed to pay for Mubararek's prostitutes? Of course not.



It should be a crime to lend money to a tyrant. The US government is tyranny. If you bought a governent bond then sell it and buy silver...if you didn't then good luck trying to collect fuckers!

Thu, 04/14/2011 - 17:49 | 1170503 NotApplicable
NotApplicable's picture

It should be a crime to lend money to a government. Oh wait, they lend it to themselves...

Thu, 04/14/2011 - 17:56 | 1170525 gabeh73
gabeh73's picture


Thu, 04/14/2011 - 20:21 | 1170899 The Navigator
The Navigator's picture

Hang 'em or double hang 'em.

Mon, 07/18/2011 - 00:15 | 1465433 kiran1234
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Thu, 04/14/2011 - 19:55 | 1170854 walküre
walküre's picture

Illegitimate or Odius Debt.

Our leadership has the audacity to point the finger on 3rd world leaders and their spending binges. The corrupt leadership went into debt to buy of course from the major companies that put the 1st world leadership into place to begin with!

Anyway, it shall not matter much soon.

At the rate the US is deteriorating, it can only hope to reach official 3rd world status before the debt collection gets serious.

Please everyone, in such time of great turmoil the most exposed shall perish first.

Don't look at Ruanda and say it can't happen here.


Mon, 07/18/2011 - 00:13 | 1465428 kiran1234
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Thu, 04/14/2011 - 16:50 | 1170274 mule65
mule65's picture

Hmmm, GOOG Q1 net income of $2.3B and a market cap of $186B?  Pass.

Thu, 04/14/2011 - 17:02 | 1170331 css1971
css1971's picture

Can you say bubble?

 And all the tech people I know want to be just like them.

 See all those data centers they have? Gulping gigawatts of energy, which is getting more and more expensive.


Thu, 04/14/2011 - 18:04 | 1170549 Quantum Nucleonics
Quantum Nucleonics's picture

Well, it isn't $186 billion any more... down 5% AH.  To be fair, that $186B includes $35B in cash.  Earnings of $10B-ish (TTM) on a market cap of $140B-ish isn't great, but it isn't NFLX either.

Thu, 04/14/2011 - 16:50 | 1170283 Gold 36000
Gold 36000's picture


It was selfish old people who ran up the debt for me to pay before I was old enough to vote.

Forcing me to labor due to actions of my ancestors is slavery.

Default is the only moral solution to an unjust debt that i did not sign up for.

Thu, 04/14/2011 - 16:52 | 1170285 tmosley
tmosley's picture

No need to worry about that, they'll just increase the deficit.  Problem solved!

Thu, 04/14/2011 - 16:50 | 1170287 tek77blu
tek77blu's picture

one final asset deflation market collapse, then off to hyperinflation we go:

Thu, 04/14/2011 - 16:53 | 1170296 mdwagner
mdwagner's picture

How about interest rates like in the 70s when it was 13%?  We're talking over $2 trillion then.  It really doesn't matter what happens in 2020 because either inflation is going to be out of control or interest rates will be so high that we have to default on the debt.  Take your pick.

Thu, 04/14/2011 - 16:55 | 1170299 Just Observing
Just Observing's picture

I rather doubt by 2020 there will be a US dollar around to price anything in, much less debt owed on some old dusty Treasury notes which will only have value as wallpaper or stove fuel.

Thu, 04/14/2011 - 16:56 | 1170303 dan10400
dan10400's picture

It would be interesting (or maybe just a horror show) to apply the CBOs interest rate assumptions to the Feds balance sheet....

Thu, 04/14/2011 - 16:56 | 1170311 css1971
css1971's picture

Public debt is only 14 Trillion. Don't worry about it. Total debt is many times more.


Thu, 04/14/2011 - 16:59 | 1170316 Muir
Muir's picture

Tis but a scratch.

Thu, 04/14/2011 - 18:41 | 1170667 tawdzilla
tawdzilla's picture

are you doing jumping jacks or jumping rope?

Thu, 04/14/2011 - 21:31 | 1171019 Blano
Blano's picture

Does it matter??

Sun, 07/17/2011 - 22:30 | 1465274 kiran1234
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Thu, 04/14/2011 - 16:59 | 1170322 apberusdisvet
apberusdisvet's picture

The USD dominos are starting to fall.  A meeting of the BRICS on Hainan Island off China concluded with an agreement to mutually trade in their own currencies.  Hmmm. No MSM reporting on this.

Thu, 04/14/2011 - 17:04 | 1170326 Beam Me Up Scotty
Beam Me Up Scotty's picture

IN 2020 They estimate the deficit to be $685 billion.



Thu, 04/14/2011 - 17:51 | 1170513 NotApplicable
NotApplicable's picture

Assuming anything is still measured in dollars by then, $685B will likely be a week's worth of deficit.

Thu, 04/14/2011 - 17:03 | 1170329 AC_Doctor
AC_Doctor's picture

NEWS FLASH - Irrevelent, we will not make it past 2013 anyway.

2013-2014 hunting season will be exciting with new forms of game

to poach...

Thu, 04/14/2011 - 17:04 | 1170330 macholatte
macholatte's picture
Democracy... while it lasts is more bloody than either aristocracy or monarchy. Remember, democracy never lasts long. It soon wastes, exhausts, and murders itself. There is never a democracy that did not commit suicide.
John Adams
Thu, 04/14/2011 - 17:05 | 1170333 hedgeless_horseman
hedgeless_horseman's picture

Our whole deficit will be a result of the interest on accumulated debt.

Not true.  Correlation does not equate to causation.

Thu, 04/14/2011 - 17:05 | 1170342 Holodomor2012
Holodomor2012's picture

Usury.  Puzzlin the goyim since ~2000BC.

Thu, 04/14/2011 - 17:10 | 1170361 gwar5
gwar5's picture

We're all Irish now. We're not broke, the Fed is.

Renegotiate the arrangement or default to the Fed.

They don't like it we drill baby drill and print our own damn money without the usury. 

What's backing their FRN? Us?


Thu, 04/14/2011 - 17:15 | 1170381 AC_Doctor
AC_Doctor's picture

Fuck the Fed bought 1.2 trillion in toxic, underwater mortgages with 2nd and even 3rds on them that are probably worth 5% on the dollar if that much?  Don't tell me the taxpayer is going to profit of that steaming load of shit...

Thu, 04/14/2011 - 17:14 | 1170369 Zina
Zina's picture

Welcome to my world!

Here in Brazil, the federal government spends more with interest on debt per year than with Education, Healthcare, Maintenance of federal roads, Law enforcement, Science & Technology, and Tourism promotion, combined.

Yes, combined.

Thu, 04/14/2011 - 17:18 | 1170386 AC_Doctor
AC_Doctor's picture

Sorry to hear about your govts. ignorance, but the US isn't that much farther behind with all it's unfunded liablities...

Thu, 04/14/2011 - 17:38 | 1170457 gabeh73
gabeh73's picture

This is where the term Prisonplanet comes from. All the BIS banks as one...with international armies used to make sure that interest payments are never missed. This is the goal. You think the World bank is trying to get economies growing on their own independently? wron.

Thu, 04/14/2011 - 17:43 | 1170477 walküre
walküre's picture

Despite that, I'm more bullish on the Real than the USD.

At least Brazil has something in the ground and above that the world wants and needs.

See the BRIC agreement to shun the Dollar trade.

USD is done, stick a fork in it. Nobody is admitting it yet of course but everybody is positioning their assets accordingly.

It will be bad enough when the US collapses. It would be worse if everyone else is trying to save the ship from sinking.

Blame belongs to the bankers and the attorneys and their political whores. Hands down.

Thu, 04/14/2011 - 21:46 | 1171043 pods
pods's picture

But at least you have one hell of a national dog!


Thu, 04/14/2011 - 17:40 | 1170458 baby_BLYTHE
baby_BLYTHE's picture


Michael Scheuer is back!: slams Obama, Clinton, NATO & The Western Media


Thu, 04/14/2011 - 17:37 | 1170459 Cole Younger
Cole Younger's picture

"This is based on multiple assumptions, but at least a few stand out as optimistic, if not outright fantasy. "

I agree. Come the end of May, who knows where the bond market will be...2, 3, 4, 5, etc percent. higher?

Thu, 04/14/2011 - 17:38 | 1170464 Caviar Emptor
Caviar Emptor's picture

They proved that deficits don't matter for as long as it enriched the cronies. Government spent lavishly on the oil-military-industrial complex and Wall Street. 

Now they proved that deficits totally matter but they want the middle class to make up the difference. 

Makes sense, no? It's the "American D:Ream" 

Thu, 04/14/2011 - 17:56 | 1170531 Smokey1
Smokey1's picture

Short-sighted and optimistic analysis.

Interest rates will ramp up sharply before 2020, and interest payments will be closer to $2 trillion by that time.

If the entire system has not collapsed by then.



Thu, 04/14/2011 - 18:11 | 1170575 AldoHux_IV
AldoHux_IV's picture

Dissolve the fed, and you dissolve the fiscal problem.  The bigger problem is replacing the idiots in congress and the white house with ones that can actually create the policies this country needs.  Also, ending the centrally planned economic genocide by targeting the IMF and Worldbank.

Thu, 04/14/2011 - 18:35 | 1170649 PulauHantu29
PulauHantu29's picture

"Deficits don't matter," Cheney said.


Thu, 04/14/2011 - 18:40 | 1170669 Just Observing
Just Observing's picture

Not a whole lot matters when you're like Cheney with one foot i the grave and the other on a banana peel.

Thu, 04/14/2011 - 22:10 | 1171109 pods
pods's picture

I think you need silver through his heart to actually do it properly, if I can remember my AD&D correctly.


Thu, 04/14/2011 - 18:45 | 1170674 Andrew G
Andrew G's picture

Debts don't matter coz they can't be paid and they won't be paid (in real terms, not necesarily nominal).

Thu, 04/14/2011 - 18:58 | 1170709 I am Jobe
Thu, 04/14/2011 - 18:57 | 1170710 Eireann go Brach
Eireann go Brach's picture

Fucking bullshit..the deficit for the first half of this year is already $865 Billion..add a Trillion on each of these annual figures above...

Thu, 04/14/2011 - 19:09 | 1170738 I am Jobe
I am Jobe's picture

Hope and change. Yes we can.

Thu, 04/14/2011 - 19:18 | 1170755 Everybodys All ...
Everybodys All American's picture

Where in the hell do these people think we live? No way in hello will we have a GDP near 6% with this kind of inefficiency.

Thu, 04/14/2011 - 20:22 | 1170901 The Navigator
The Navigator's picture

Another govt lie - there will be no 2020 - the financial world will fall apart long before 2020 - a wet dream to think otherwise.

Thu, 04/14/2011 - 20:37 | 1170903 AldousHuxley
AldousHuxley's picture

Who says US will be paying? Interests don't matter when you default.

It is like some ugly Jewish American guy who buys fancy cars on credit and homes on AltA liar loans. Then he uses the material wealth to attract gold digger women. Smart European women with experience with capital will smell something fishy, but a few women bought into it and that's all he needs...few "suckers". One women from Japan thought, if she puts up with this American guy for few years, she can declare divorce and get half of his wealth including that nice penthouse in Manhattan, so she continues to be a sucker and marries this ugly guy. Then one day the gold digger digs enough to find out he has no real job and no money in the bank. There is no real gold. Just paper gold. In fact HIS debt obligations are HER obligations too. He is poorer than her! Soon enough the home is foreclosed, car repossessed, and women decides to leaves him, but she got nothing except half of his DEBT. She can't take back all the nights he slept with her and now she's too old to find another sugar daddy. She thought she was going to screw him over, but it is she who got screwed. People started to call her the "lost decade". Last I heard, she nearly drowned in a tsunami.

The guy declares bankruptcy, but then comes back few years later to play the same game. He steals some money at a gas station operated by some middle eastern owner and buys even fancier house and cars. This time he meets a desparate Chinese lady. Chinese lady is new to money and haven't heard about what had happened to the Japanese lady who was previously married to this guy. She is now married to this American guy.

Thu, 04/14/2011 - 20:23 | 1170909 linrom
linrom's picture

Net Interest paid is $202 billion in 2010 and $778 billion in 2020.  Sadly that is a growth rate I can believe. .


LOL. Sure. Why don't use your crystal ball and becaome a trillionare by 2019.

Thu, 04/14/2011 - 22:01 | 1171075 web bot
web bot's picture

This one posting is the checkmate move.

The fact that over 50% of US debt is held in terms of under 3 years and the inevitability that interest rates are going to rise means checkmate. I see no way around this.

This is the ONE factor that everyone needs to keep their eye on. Once rates start to move, we're into a brave new world.

Thu, 04/14/2011 - 23:41 | 1171349 Stuck on Zero
Stuck on Zero's picture

Exactly how have I benefited from all this debt?  Please remind me. 

Fri, 04/15/2011 - 01:16 | 1171494 Bansters-in-my-...
Bansters-in-my- feces's picture

Thats what Joo confetti is designed to do....

Make Banksters fithy rich.

We get it allready.

Fri, 04/15/2011 - 01:30 | 1171506 Bansters-in-my-...
Bansters-in-my- feces's picture

You benefit by breathing.....

Now breath slowly.

Fri, 07/15/2011 - 07:49 | 1458789 kiran1234
kiran1234's picture

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