Thursday, June 3, 2010

Public Debt Financing Requirements for 2010

Veronique de Rugy at the Mercatus Center produced the graph above of Advanced Economies' Gross Financing Needs in 2010 as a percentage of GDP. de Rugy also comments:
This amount of debt, approximately $5 trillion for the United States, is an important metric – our public financing needs represent a massive amount of credit that will not be available for use by private investors; it also quantifies our susceptibility to credit market volatility.
And that volatility is going to make for a wild ride. Wikipedia notes that the interest paid on US debt fell from almost 10% of all spending in 2008 to just 5% in 2009:
Budgeted net interest on the public debt was approximately $240 billion in fiscal years 2007 and 2008. This represented approximately 9.5% of government spending. Interest was the fourth largest single budgeted disbursement category, after defense, Social Security, and Medicare.[62] Despite higher debt levels, this declined to $189 billion in 2009 or approximately 5% of spending, due to lower interest rates. Average interest rates declined due to the crisis from 1.6% in 2008 to 0.3% in 2009.[63]
So the interest rate fell to one fifth its previous value (1.6% to 0.3%) and interest payments as a percentage of government spending were only cut in half (9.5% to 5%). While interest payments as a percentage of spending were only halved, the reduction in absolute terms (from $240B to $189B) means that interest payments only fell by 22%—spending rose so much in 2009 that it makes interest payments as a percentage of spending look remarkably better. When interest rates increase from 0.3%, expect huge chunks of federal spending to be devoted to servicing the debt.

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