If fewer people are willing to lend us money, the more we’ll have to shell out in higher interest payments. And if bond buyers lose confidence in our ability to make good on that debt, things could get really ugly, really fast.
As Sen. Tom Coburn (R., Okla.), who served on the deficit commission and supported its recommendations, pointed out at a press conference this week, the United States has, historically, paid an average of 6 percent interest on its debt. It currently pays about 2 percent. If rates were to return simply to that historical average, it would involve an increase to our overall interest bill of $640 billion to be paid immediately. “An impossible situation,” in Coburn’s words.
And that’s why the Federal Reserve is buying U.S. Treasuries. If they didn’t, the U.S. would have to pay higher interest rates on its debt, and we can’t afford to.
None of this can go on forever. The Fed can’t print money forever. The U.S. can’t borrow huge fractions of GDP forever. Austerity is coming. The only question in my mind now is whether we’ll have a currency collapse and hyperinflation first.