The Simple Problems Of Too Much US Debt

Tyler Durden's picture

In a succinct and chart-laden presentation, Professor Antony Davies, of Duquesne, offers a simple perspective on just how bad things are for the US (in terms of debt or obligations). Putting the interest cost in the context of war-spending, his analysis is interesting given the recent and dramatic rise in interest rates. Current interest payments, given the US Government's lowest ever 3% interest cost, are $440 billion, or three times the annual operating expenses of the Iraq and Afghanistan wars. While his discussion of a market-set interest rate is perhaps a little off-the-mark given the extent of QE programs and their reach-around prime-dealer duration-reducing effects, it is nevertheless true that the more money the government is spending on interest, the less money is available to provide services and his punchline on what happens should rates rise even modestly from here sums the real problem the US faces (even as a currency issuer as opposed to a currency user - given the inherent instability that making totalitarian use of the reserve status would incur).

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SolidSnake961's picture

if the fed owns most of the bonds, and they turn the interest payments back to the treasury, then why do interest payments matter?

ps: dont hate if this sounds stupid, college student still learning

Hedgetard55's picture

Not a dumb question at all. It means that only the FED is buying the debt, and to do that they need to print money, debasing the currency. Since there is no free lunch, all holders of cash and it's equivalents are in essence buying the debt indirectly through loss of purchasing power.

Pladizow's picture

It also means the treasury wants the debt as high as possible, as they are the recipents of the interest payments.

                             "It is difficult to get a man to understand something, when his salary depends on him not understanding it." - Upton Sinclair


SolidSnake961's picture

so this is the "secret inflation tax" that ron paul talks about

Cheesy Bastard's picture

It is always easier for me to understand when cartoon bears explain stuff.  Here:

Pinto Currency's picture


Too much debt?

The Fed says we need more and more debt until things get better.

That will be covered in Thursday's lecture.

comrade pravda's picture

Now that Ben Shitter is telling all the little people about the benefits of feudalism, I wonder if he might...

Visit some unemployed college graduates (a.k.a. debt peons) for his next  whistle stop.

While he is doing that perhaps he can explain how keeping the same fools who bankrupted Wall St in 2008 in charge of the economy today is helping restore America's economic health.  Oops, silly me, Ben Shitter made them billionaires all over again with the money of us little people.  Hey, they are are rich.  They must be right.

Thanks Ben Shitter, I feel better already.

Pairadimes's picture

Sounds like his name should be Ben Dover.

ndotken's picture

"The government needs to take advantage of the low interest rate environment and pay down as much of the debt as it can."


Bwahahahahahahahahahahahaha ... pay down the debt??? .... the government is ADDING $1.3 Trillion a year to the debt .... and a major aisle fight broke out over cutting $30 Billion from the budget ... this country is soooooo FAWKED

true brain's picture

Fucked. This country is fucked. Just say it. You don't have to be polite or camoflaged its true nature. When it comes to the truth, let the truth rings free.

Debt-Is-Not-Money's picture

"and pay down as much of the debt"

With what? This is what happens when one fails to define debt and money.

Debt can only be "payed down" with money. Money is purchasing media with no interest owed.

All of our currency (including computer entries) is debt as it is encumbered by interest.

The real problem is that we have no money so it is impossible to pay down the debt (any and all of it)!

buckethead's picture

If debt is an asset, how can one hold/owe too much?


Assets are good, right?



Stax Edwards's picture

You have the right idea, may I interest you in a job?


Harlequin001's picture

I am willing to exchange as many assets as you can handle in exchange for your gold...

I have an unlimited supply...

Does that explain it?

Koffieshop's picture

so this is the "secret inflation tax" that ron paul talks about


It's not just that, its a tool to spread influence and tax the global economy.

Just watch this little 4 part series:

Belarusian Bull's picture

This is outstanding. Thank you for the link, i had no idea about that ESF monstrosity.


JohnKozac's picture

The Fed crowds out other buyers and distorts markets by interfering with mis-pricing risk since it is artifically holding interest rates too low.

You might enjoy this previous ZH article that makes another point:

"Private investors are crowded out of the market when the Fed shows up as a large and powerful bidder. As a result, the administration and Congress make tax and spending decisions—with huge implications for our standard of living—with heightened risks around future funding costs."

smb12321's picture

The FED's role has changed dramatically since I was a kid a thousand years ago. It was not uncommon to give treasuries as gifts for birthdays or graduation.  Plus everyone has some as investments.  Of course, this was pre-runaway welfare, SS, Medicare, Medicaid, tax give back, etc.    Now, a government instrument (Fed) is buying debt and "lending" it to the Treasury who (somehow) will pay it back with interest - a Ponzi scheme of the first order.

Kegfreak's picture

Can you please switch back to your old avatar?  It was the only thing worth looking at on the internet at work.

bilbao's picture

False. This is a common misconception. Treasuries are already one of the most liquid markets in the world. Your ability to spend is not constrained whether you have all of your money in Treasuries no more than having your money in a Savings Account (rather than a Checking Account).

So, if the Fed were to gradually replace every Treasury Bond in the world with Cash it would not cause inflation since the net financial assets in the private sector would still be the same.

The only thing that would change would be the liquidity, but people's desires to save would still be the same.

Pladizow's picture

I don't understand, how many I-Pads is that?

Taint Boil's picture



$50,000,000,000,000 / $500 = 100,000,000,000 iPads

6,840,507,003 people on earth – about 14 iPads for every person on earth

Pounding down the brewskis and went to public schools so the math might be off





traderjoe's picture

Even if the Fed is buying 'most' of the currently issued bonds, they don't own 'most' of the current stock of outstanding bonds.

The more important topic is - why is a sovereign nation paying interest at all? Why has a sovereign country delegated its money creation powers to private, commercial banks? Under fractional reserve banking, the commercial banks can create money out thin air - for free - and then lend this 'money' back to the sovereign, at interest and with the collateral of future tax receipts (i.e. your productivity). 

See the United States Note - issued without interest or debt, straight from the Treasury. Sure it was fiat currency (backed by nothing), but at least it was the people's currency. 

Interest on sovereign debt is the scam of the century. 

Bunga Bunga's picture

As long as United States Notes are backed by gold, no problem. And the gold in a federal building's basement is not useless as Bernake suggests, because it circulates as hard currency in paper notes.

Joseph Aguirre's picture

... The dollar is a fiat currency, it hasn't been backed by gold since the 70s.

Matt's picture

I suspect that auctioning off bonds to create new money, the debt ceiling, etc are mechanisms designed to at least slow the rate of currency debasement. If the government could just print money, imagine how fast it would devalue?

traderjoe's picture

In Modern Monetary Mechanics, printed by the Chicago Fed, the paper admits that the vast majority of 'money' in the system is created by commercial banks (when they make loans). Sure, government printing debt-free money has issues - but its still the people's currency and not the bankers [fraudulent] currency.

MachoMan's picture

They're not meant to slow the rate of currency debasement...  that can be accomplished through rudimentary discipline.  They're there to further entrench and pay the hungry hippos and all the unnecessary middle men.

goforgin's picture

Foreigners collect 40% of interest payments on US Government Debt. Martin Armstrong calculated that 80% of current debt outstanding is due to interest compounding?

If the FED owned or purchased all the government debt then as you say interest rates rates wouldn't matter. But, this not the case. When sovereign governments can print debt free money, that's REAL money. Banks issue credit money.

More from Armstrong: he is forecasting that interest rates payments will increase by 2 1/2 x to 10 billion dollars per week from current 4 billion by 2015. That's why all this propaganda against social spending--they're just making room for interest.

Dr. Engali's picture

The fed only owns 1.3 trillion of the 16 trillion in debt. All the other debt is owned by foreign governments, money market funds, mutual funds , pensions and do on. So the treasury isn't getting all that interest back. But the real problem is that the fed continues to print to buy said debt, thus killing the buying power of the dollar and of the existing bond holders. If the fed wasn't printing and squeezing the poor and middle class bond rates would be much higher.

jerry_theking_lawler's picture

you are doesn't matter. now come back and see me in 20 years "Dr. who gives a fuck" and lets have the same conversation....

Carp Flounderson's picture

Trying to learn about economics on zerohedge is about as smart of a move as trying to learn about... well, anything... by listening to alex jones.  Zerohedge articles on economics are fantastic contrarian indicators.

alexwest's picture

good question.. you gonna make AAA student..


WHERE DID FED GET MONEY TO BUY INTEREST BEARING INSTRUMENTS? it doesnt have taxation authority.. how did Fed balance sheet grow from 800 bln to 3 trln in a few short years...

asnwer : THEY MADE MONEY UP... its ponzi scheme..


Ghordius's picture

they print tokens. those tokens used to be exchangeble for gold, yes. until 1933 for US residents and until 1971 for foreign governments and central banks. those tokens are the government approved accounting method for taxes. technically, it's not a ponzi scheme, just another fiat currency. of course, if you "print" every year much more than what you expect to gather in more in taxes, this gives more currency going somewhere else.

Debt-Is-Not-Money's picture


Einstein reportedly said:

"The Federal Government can issue money directly.

Why do they need a middleman?"

tjp's picture

"if the fed owns most of the bonds, and they turn the interest payments back to the treasury, then why do interest payments matter?"

My understanding is that the Federal Reserve -- a private banking cartel -- does not turn the interest over to the U.S. Treasury, but to its shareholders, comprised of member banks.

Thus, the wealth of the U.S. is systematically transferred from its citizens to an elite group of wealthy bankers.

Ghordius's picture

no, nothing as crass as this. the fact that the FED is a "private" organisation is irrelevant - the profits of the banking cartel are not given directly in form of dividends (in fact it's the US Treasury that receives "excess profits" from the FED), they are by virtue of being allowed to partecipate in the "largesse" of the FED in form of liquidity, bailouts, UST transactions, the "mother hen" function of the central bank, etc.

Congress could nationalize the FED by a law this very day in exchange for one USD and it would change nothing.

Corn1945's picture

The end game is in sight here. Debt is a poison when a slight rise in interest rates bankrupts you immediately. 

There is no way out except default, either by printing or outright default. 

How many times has this exact same game played out through human history yet we keep having the same arguments over and over again?

Seer's picture

Thank you so very much for reaching out beyond the trite, petty politics of today.

People don't want to identify the REAL truth as to why this keeps repeating- perpetuation of the growth lie.  EVERYWHERE all you hear is that we MUST protect "growth," we MUST GROW!  This centrally planned GROWTH is what allows our slave masters to control everything.

Whenever you see the word "interest" substitute "rate of growth."

Most here clamor for backing currency with something tangible/physical, like gold.  This is good, but it's still missing the bigger picture: it's got the right elements (no pun intended), but it doesn't really hit the root of the problem.  "Rate of growth" really means "rate of increases to consumption levels" IS the problem, the physical world isn't the same as a virtual printing press.

Incubus's picture

humanity doesn't necessarily "progress."


What you have is a large labor-class that retains the same basic mass psychology through-out the history of civilization.


Their operating environment may change through innovations of exceptional minds, but it matters not.  The ignorant masses will claim "genius" as their own and attribute it to their own ability when they do nothing but provide the labor and consume and fuck.


If "we" last the next 10,000 years, we'll be debating the same old shit, in a different tongue.

Seer's picture

EVERYTHING is based on the "promise" of tomorrow's prosperity.  That is what "growth" is all about, it's an illusion/lie perpetuated by the ruling classes.  Growth, however (someone junked me for stating a mathematical fact, WTF? [grow up, people!]), canNOT continue in perpetuity.

We're not going to see another 10,000 years.  The earth's inter-glacial period is roughly 12,000 years, and we've just about run out of That clock.  Next cycle, glacial period, here we come!  And, well, it's not going to be all warm and fuzzy like this here inter-glacial period.  From iPads to iCaves...

Beam Me Up Scotty's picture

Why would they turn the interest payments back to the treasury?  That sounds like a big happy circle jerk.  And thats probably what it is.

r00t61's picture

The Fed is required by law to turn over their interest payments back to the Treasury.

Not that laws matter much more in amerika, anyhoo.

SoundMoney45's picture

90% of interest to the treasury, 10% to Federal Reserve Corporation stockholders.

Pancho Villa's picture

Bond vigilantes still sleeping soundly. But when they wake up, boy are they going to be pissed!

Uchtdorf's picture

Angry perhaps, but what are they going to do about it? GM bondholders & Hellenic Republic bondholders got shafted, but no shots fired yet. Docile as lambs, if you ask me. Why is that? Nihilism? Fatalism? Too Big To Do Anything About It-ism?

Pancho Villa's picture

The private sector stopped loaning money to Greece (except at huge interest rates) forcing the government cut spending and beg money from the ECB. Which caused Greece's economy to go into a depression.

In the US things will be different. Interest rates will rise as they did in Greece, but the US government will print dollars and shrink the debt via inflation. The people who will be hurt most will be the ones who are silly enough to be holding dollar-based debt just before the "Great Reset". Holders of physical PM's should come out OK (as long as the US gov doesn't confiscate them). And PM prices might even skyrocket as everyone scrambles to get out of bonds and into physical assets.

JohnKozac's picture

I agree w/ you Poncho, printing and devaluing the debt is the only realistic way out of this mess. Same as in the past .