Increasing The National Debt By $6 Trillion In One Committee Meeting

Could a committee of unelected officials increase your household's share of the national debt by $60,000 in a single meeting? In normal times - they could not. However, these are not normal times, and any appearance of normality is deceptive.

The committee in question is the Federal Open Market Committee (FOMC). They met in March of 2018, and as expected, they raised the targeted range for Federal Funds rates by 0.25%.

As communicated with the release of the new "dot plot", the new median expectation of the committee is that they will raise rates three times in 2019, instead of the former two times. If the Federal Reserve does carry through and this happens, interest rates will increase by a total of 3.25% from their post-crisis lows by 2020, instead of the 3.0% that was previously expected.

If that mere 0.25% increase impacts all interest rates (short, medium and long-term), and if it persists over time, then two extraordinary things will happen that may each seem improbable for those who don't think in terms of financial mathematics.

The first is that for long-term savers and investors, that one 0.25% additional increase will be producing more annual compound interest in 30 years, more interest earnings on interest earnings, than the sum total of compound interest that could be earned in 30 years when investing at the post-crisis low-interest rates. Just that little "tweak" of adding another 3.25% instead of 3.0%, if given enough time, produces annual increases in wealth that would likely seem completely non-intuitive to the average person.

However, for a nation that is over $20 trillion in debt, and is borrowing all the money each year that is needed to make interest payments on that debt, the same mathematics of compound interest mean that a seemingly trivial 0.25% increase is enough to increase the national debt by an additional $6 trillion in 30 years.

If we look in round number terms at roughly 100 million households with incomes above the poverty line in the United States today, that translates into a $60,000 increase per household in their share of the national debt in 30 years. With the sole cause of that $60,000 increase for each of our household shares being paying another 0.25% in interest on the current and future national debt.

As analyzed herein the federal government has a nonlinear risk when it comes to interest rate increases, and seemingly trivial changes can create financial problems that far exceed what most people would intuitively expect.

These numbers seem fantastic - because the situation is fantastic. The reason for this analysis is not to depress or to predict gloom and doom, but to make crystal clear that the future cannot be like the past, and what was normal in prior times just won't work for much longer.

The implications are likely to change performance in all the major investment categories including stocks, bond, real estate and precious metals. Indeed, because the future can't be like the past, those engaged in long-term financial or retirement planning are likely to be surprised again and again if their plans are based on historical "normality".

This analysis is part of a series of related analyses, an overview of the rest of the series is linked here.

A $6 Trillion Increase

The previous analysis "The Potential $54 Trillion Cost Of The Fed's Planned Interest Rate Increases" (linked here) took a detailed look at the long-term implications of the Fed's intentions to likely raise interest rates by 3.0%.

As explored in that analysis, paying an average 2.25% interest rate on the federal debt in combination with the continuation of current deficits and the extraordinary expenses of the Social Security and Medicare programs as the Boomers continue to retire and age in retirement is enough to produce an almost $84 trillion national debt by the year 2047 in nominal dollars (not adjusting for inflation).

If the Fed carries through with raising interest rates by 3%, then the national debt in 30 years becomes $138 trillion instead of $84 trillion, which is an increase of $54 trillion.

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Disclosure: This analysis contains the ideas and opinions of the author. It is a conceptual and educational exploration of financial and general economic principles. As with any ...

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