Can A Nation $19 Trillion In Debt Afford Higher Interest Rates & Will This Change Our Retirements?
For some years now, very low interest rates have been reducing the earnings of retirement investors as well as the lifestyles of many of those already retired. To understand why this has been happening – and why it may continue for a very long time – one must recognize that there is a direct relationship between the interest rates that are paid to savers, and the interest payments made by a heavily indebted federal government.
For a retirement investor who is currently earning a 1% interest rate, a 5% increase in rates to a 6% return would increase their total investment earnings by 1,263% over 30 years, allowing for a radical improvement to their eventual retirement standard of living.
And for a current retiree who is drawing down their investment portfolio over 20 years, a 5% increase in annual interest rates from 1% to 6% would allow them to raise their standard of living by a full 57% in each and every one of those years.
Because the government borrows the money to make interest payments, this could set off a chain reaction of paying interest on money borrowed to pay interest, leading to a national debt increase of the current $19 trillion up to $94 trillion in 20 years. So unless there are some huge tax increases, a 5% increase in interest rates would increase the national debt by $75 trillion.
To put such a fantastic number in more personal terms, if we divide it by the number of American households with incomes above the poverty line, that means that for each able to pay family, their personal share of the national debt would rise by almost $700,000.
So the very same major increase in interest rates that so many millions of savers badly need for their financial security – could simultaneously send the national debt spiraling upwards and out of control.
Let me suggest that this relationship creates an extraordinary financial conflict of interest between savers and the government.
Many people believe that the enormous national debt is a somewhat theoretical problem for the future. That is, they suspect that it will at some point be a great financial burden for our collective children and grandchildren to deal with, but they don’t see a direct impact on people’s lives today in any major or practical way. At the same time, they are quite frustrated by the very low interest earnings that could force them to delay retirement, or if they are currently retired, that are already reducing their standard of living.
What they fail to see is that record setting national debts and record low interest earnings for savers are not separate issues but rather they’retwo sides of the same coin.
When we understand this essential point, we can see that massive national debts dramatically and directly impacting the lives of many millions of people is not something to anticipate in the distant future, but rather it is happening right now just as it did last year, and just as it will likely happen again next year.
And in seeking viable solutions for investing in this challenging environment, there is no substitute for understanding why it is that we currently have such low interest rates, and why they may continue into the indefinite future.
A Mysterious Reduction In Interest Payments
The graph below shows the amount of federal debt outstanding over the last 40 years. As can easily be seen, the federal debt exploded upwards with the financial crisis of 2008, and began its meteoric ascent to the over $19 trillion dollars outstanding.