Important Insights into the Looming Debt Crisis

“A rate of 8% would cost the government half its tax revenues”

by Bob Stokes
Updated: February 16, 2023

When many Americans hear the phrase "government debt," their eyes tend to glaze over. It seems to have little meaning to their everyday lives.

Yet, the ballooning national debt is not just some far away issue which Washington D.C. politicians debate. It's become so large that with rising interest rates, the cost of servicing that debt could eat into government programs and even the military.

This is what Senator Rand Paul told a Fox Business interviewer on Feb. 5:

I think the number one threat to our national security is our debt. We have a $31 trillion debt. And that does include $850 billion we spend annually on the military.

...If you are serious about the deficit, you have to look at military, non-military, and you have to look at everything that's on the budget, including mandatory spending.

Other prominent observers have also said that the country's debt is the main national security threat.

Interest payments on the national debt exceeded $475 billion for Fiscal Year 2022, according to the Committee for a Responsible Federal Budget. Mind you, the principal amount of $31.5 trillion is not dented one bit with these payments. And the principal amount continues to grow -- rapidly, as anyone who checks out the US debt clock sees.

This leads us to an important question asked by the January Elliott Wave Theorist, followed by the answer and other commentary (below):

At What Rate Would All the Federal Government's Tax Receipts Go to Paying Interest?

The national debt is $31.4 trillion (this figure has risen since the January Theorist published). Total federal tax receipts in 2022 were $4.9 trillion. The ratio is 0.156. So, at current tax and debt levels, an annual interest rate of 15.6% on the national debt would eat up all federal tax receipts. Such an interest rate is hardly impossible. Interest rates on Treasury debt were above that level in 1981.

That calculation is optimistic. In a bear market, tax receipts from capital gains will fall, and in a recession or depression, tax receipts from wages and profits will fall. So, the interest rate at which the government will have to spend all its tax receipts on interest is probably below 15.6%.

It will not take that level of interest rates to cause a problem for the government. Every uptick in rates draws more money from government programs to pay interest on the national debt. A rate of 8% would cost the government half its tax revenues. That is not a minor crisis.

The Elliott Wave Theorist provides more important financial insights.

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