Last year the US paid $454 billion in interest payments on its debt. This was at a time when the average interest rate was only slightly above 2%.
During the same year, the US only took in about $2.3 trillion in tax revenue. So, even with interest rates at historic lows, we’re spending about 20% of tax receipts on interest payments.
Now let’s suppose that interest rates rise to an average of 4%. At that rate, the US would owe nearly $900 billion in interest payments: enough to soak up nearly 40% of all US tax receipts. And this is assuming tax receipts don’t fall as the economy contracts (historically taxes do fall during times of contraction).
This is why the Fed is committed to keeping interest rates low: if interest rates were to rise then the payments on the debt would send the US into an EU-style debt crisis along with the commensurate intense austerity measures being implemented.
Having said that, the bond market may force the Fed’s hands, at which point it’s Checkmate for Bernanke.
I agree with you mazz, and if those rates would rise to 5 or 6%(which could easily happen someday), the debt burden would be unpayable...which would lead to another interest rate increase...and more interest we cant pay, etc,etc. We are greece, it's just a few years away, especially when were adding a trillion+ each year as far as the eye can see.