US Governmental Debt Now Exceeds $13 Trillion

How Long Will Foreign Investors Finance our Standard of Living?

June 9, 2010 - The Euro crisis has focused investors worldwide on governmental debt.  And, frequently now U.S. governmental debt is mentioned in the same breath as debt concerns of Greece, Portugal, the UK and Spain.

President Obama continues to increase governmental debt to unprecedented levels, and one that will, in 2012 surpass America’s gross domestic product. 

This month, total governmental debt exceeded $13 trillion for the first time.  Based on projections made by the International Monetary Fund (IMF), in 2012 the total will exceed U.S. gross domestic product. 

Since 1990 the rate on 30 year U.S. Treasuries has been as high as 9 percent.  Right now, with the Federal Reserve keeping interest rates near zero, the interest rate on 30 year Treasuries is slightly over 4 percent.  While the beneficiary of the “flight to safety” has been the U.S. dollar, this will not last indefinitely.  If 30 year rates return to a more normal level, the cost of financing the government’s debt could easily reach 6 or 7 percent.  Based on $13 trillion of debt, the annual interest expense alone could easily reach 900 billion.   To put this in perspective, the 2010 budget for defense spending, including the wars in Afghanistan and Iraq is somewhere between $880 billion and $1 trillion.  

Hiroku Shimazu, a Tokyo economist with Nikko Cordial Securities was recently quoted by Bloomberg as saying, “Over the long term, interest rates on government debt will likely have to rise to attract investors.  That will be a big burden on the government and people.” 

One has to wonder how long investors, including Japan and China will continue to finance our deficit and our standard of living.