With the Fed meeting this week, attention has turned to the impact on the economy, and the stock and bond markets. One area that seems to be missing is the impact on the federal budget. The government has been able to borrow at historically low rates for quite a prolonged time. We know tapering is ending this October (2014) and the pundits seem to think rates will be going higher around second quarter 2015. No need to panic but the U.S. does have outstanding debt of $12.8 trillion (see http://www.cbo.gov/publication/45684). That is a lot of zeros and ongoing interest expense! The Congressional Budget Office (CBO) expects interest to increase from $231 billion today to $799 billion by 2024.

Interest Expense, Spending, and Stress Tests

How will this impact government spending? Foreign policy, domestic programs and especially Obamacare? As we follow the regulator’s focus and new regulations, such as stress tests, I am curious if the government is submitting itself to stress tests. What if there was an upward parallel shift in the yield curve of 3 or 4 percent? What if the economy expands at a greater rate than anticipated? What if velocity associated with money supply moves upward and monetary inflation explodes? It would certainly seem interest expense would drastically increase and have profound effects on government spending.

Let’s hope for a goldilocks scenario!

Author

  • Ken Kapner

    Ken Kapner, CEO and President, started Global Financial Markets Institute, Inc. (GFMI) a NASBA certified financial learning and consulting boutique, in 1998. For over two decades, Ken has designed, developed and delivered custom instructor led training courses for a variety of clients including most Federal Government Regulators, Asset Managers, Banks, and Insurance Companies as well as a variety of support functions for these clients. Ken is well-versed in most aspects of the Capital Markets. His specific areas of expertise include derivative products, risk management, foreign exchange, fixed income, structured finance, and portfolio management.