US debt crisis: Interest on interest reaches $3 billion per day

With U.S. debt now at $35.3 trillion, the cost of paying interest on all that borrowing has recently skyrocketed and now averages $3 billion a day, according to Torsten Slk, Apollo's chief economist.

And that includes Saturdays and Sundays, he stressed in a note Tuesday.

Daily interest costs have doubled since 2020, from $2 trillion about two years ago. That’s when the Federal Reserve began its campaign of aggressive rate hikes to tame inflation.

Servicing U.S. debt has become more expensive, with Treasury bonds offering higher yields. But with the Fed set to begin cutting interest rates later this month, the opposite could happen.

If the Fed cuts interest rates by 1 percentage point and the entire yield curve steepens by 1 percentage point, then daily interest expenses will fall from $3 billion per day to $2.5 billion per day, Slk estimates.

Apollo

Meanwhile, the federal government closes its fiscal year at the end of this month, and the cost of interest on the U.S. debt since the beginning of the year was already $1 trillion a few months ago.

But even if the Fed's rate cuts ease the burden of interest payments, the next president is expected to worsen budget deficits, adding to the total debt pile and reversing some of the benefits of lower rates.

In fact, a recent analysis by the Penn Wharton Budget Model found that the deficit would increase under either Donald Trump or Kamala Harris.

But there is a big difference between the two.

Under Trump's tax and spending proposals, primary deficits would increase by $5.8 trillion over the next decade on a conventional basis and by $4.1 trillion on a dynamic basis that includes the economic effects of fiscal policy.

Under a Harris administration, primary deficits would increase by $1.2 trillion over the next ten years on a conventional basis and by $2 trillion on a dynamic basis.

JPMorgan analysts, however, believe that this outlook is untenable regardless of who wins the presidential election, while acknowledging the possibility of larger deficits under Trump.

Regardless of the election outcome, the trend since the pandemic has been toward excessive fiscal policy that absorbs substantial amounts of capital and encourages additional private investment, the bank said. At the same time, the massive retirement of baby boomers is shifting a substantial share of the population from a period of high savings to a period of low savings, reducing the supply of capital.

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