A simple plan that could be implemented to reduce our deficit and debt levels while increasing investment and promoting economic growth.
I thought I would introduce to you all a simple budget plan for the United States. Note that the effects of this plan may be different and we may see increasing interest rates on 30-yr T-bills if we restructure too quickly or absorb the market.
Currently our debt stands at roughly $16 trillion dollars, according to debtclock.org. For 2012 we will have spent roughly $425 billion dollars in interest payments on our debt (gross, net ~$300 billion), and gross interest on the debt accounts for roughly 15% of the federal budget. Please note that we are not talking about net debt interest, because in that case we spend more like 7%.
The problem we have is that we expect this rate to increase as we borrow more and interest rates creep up.
Today’s relatively lower interest rates have lessened the pressure debt service places on the budget, despite the recent increase in the debt held by the public. However, interest rates are expected to increase as the economy recovers, resulting in increasing pressure on the budget. – Government Accountability Office
But do we have to be subject to increasing rates? Not really, by restructuring the debt we can solve this problem as well as decrease short-term rates (if possible).
Lets start by restructuring our debt into 30-year bonds.
Here are some of my calculations:
- We would need to spend roughly $63 billion dollars a month to service both interest and principle payments to our debt ($756 billion per year) to completely eliminate our current debt obligations in by 2042
- Total interest payments over 30 years would be $7.59 trillion, total interest and principle payments would be roughly $23.5 trillion
- Per year annualized interest payments would average $235 billion
- First year’s interest payment would be $435.2 billion
- Roughly 21% of the federal budget would be spent on servicing the gross debt (declining every year)
- Roughly 5% of GDP for the same (declining every year)
As you see, interest payments would increase by just about $10 billion this first year. The second year and beyond you will see a decrease in the amount of interest paid. We further lock in our low-interest rates and do not face pressure from rising rates. Furthermore, we eventually make our debt more serviceable and create a real opportunity to lower it.
Also, if we can slowly move our debt to longer-term bonds, simple supply and demand principle suggests that we will continue to see a low short-term bond rate (the US treasury borrowing rate on short-term loans would continue to be negative). We can use that rate to finance short-term debt, projects, and deficits.
Further, we should cut inefficient public expenditure. If we add a dollar in private investment in place for each dollar cut in public expenditure we can see economic growth as a result of an expanding private sector and increased productivity and employment. If we charge a low-interest rate for this private investment, lets say 4%, matching longevity to treasury bond terms, as I highlight in 7 Reasons The Government Should Spend More Money, we can actually see public profit from this and further reduce our deficit.
So the idea behind the simple plan is that by coupling restructuring of our debt with a plan to add private sector investment you have the recipe for economic growth and both deficit and debt reduction.