Figure 1: Federal interest payments (red, right scale) and Federal interest payments to Rest-of-World (green, right scale), and three month Treasury yields in percentage points (blue, left scale). Source: BEA, NIPA release of 27 March 2008, Table 3.2, and St. Louis Fed FREDII.Note that we’re not talking big figures: $294 billion (SAAR) in 2007Q4 for total payments, and $161.4 billion for payments to the rest-of-the-world. But what’s of interest is that, rather than being an intra-country transfer, interest payments to the rest-of-the-world represent resources not made available to US residents. Of course, we benefitted from the borrowed resources which enabled US residents to consume and invest at higher levels than otherwise would be possible.

One interesting question is what will happen to this figure when interest rates rise. That is, in 2008Q4, with 3 month Treasury bill rates at 3.39%, and the ten year constant maturity rate at 4.26%, Federal interest payments expressed as a share of GDP were just over 1.1%. With most foreign holdings of Treasuries at the shorter end of the maturity spectrum, over time we should expect Federal interest payments to rise.

Just some facts to remember as various individuals [1] propose even more tax cuts.

And there is no end in sight. The CBO has just released its estimates of the full-employment and standardized budget balance. Despite the apparent bump up in FY2009, don’t be fooled. That results from the assumed end of the “fix” to the AMT, and the end to the effects of the stimulus package.

Figure 1 from CBO, The Cyclically Adjusted and Standardized Budget Measures, April 2008. [pdf].Since the graph depicts the full employment and standardized budget balances, if output turns out to be weaker than CBO projects in the next two years, then the budget deficits will tend to be bigger than depicted, and interest payments will tend to rise as debt accumulates faster.

Posted by Menzie Chinn at April 20, 2008 12:01 AM

digg this | reddit

Trackback Pings

Comments

This is just one of the many unpleasant consequences that await us as a result of the insane decision of our “leaders” (both political and economic) to continue the flow of foreign consumer goods.

Our primary role in the world economy appears to be to consume in excess of what we produce,

and everyone fully understands this.

However, the Summer Games will come and go, and then this game may go away as well if the enabling lender takes the decision that the USA is just a little too “subprime.”

Posted by: esb at April 19, 2008 10:19 PM

So, we’re giving a massive tax break to mortgage debtors which is translated into bigger payments to the Chinese. It ain’t right. Angry Renter.com

Posted by: Angry Renter at April 20, 2008 06:03 AM

It isn’t just the government that is borrowing $ from rest-of-world (ROW) at amazingly low rates. Thank you, ROW. As long as they’re willing to loan $ there is little to worry about.

Those cheap consumer goods are a big part of our standard of living. We’d be crazy to cut off the supply.

Posted by: Larry at April 20, 2008 08:32 AM

Climatologists worry about breakdown of the North Atlantic circulation that powers the Gulf Stream, preventing Europe from having the climate of Canada (London is at least as far north as the southern end of Hudson’s Bay).

I worry about the breakdown of the circulation that brings the dollars paid to Asian exporters back to our shores, preventing the US from having the consumption patterns of other nations having similar inability to produce the things their citizens want to consume.

Posted by: jm at April 20, 2008 10:37 AM

Menzie — i am not sure that most foreign government holdings are at the shorter-end of the maturity spectrum. When Elisa Parisi-Capone and i looked at this issue in the summer of 2006 (using the mid-2005 survey data) we found that central banks had a lower share of the bill market (compared to the stock outstanding) than either the 2-5 year maturity bucket or the 5-10 year maturity bucket. The fed holds mostly bills, but my sense is that the big foreign central banks like coupon-paying notes. in the short-run, the average rate on us debt held abroad should come down, which will help. but with the stock held abroad rising rapidly (look at FRBNY’s custodial holdings), over time net payments should trend up strongly.

Posted by: brad setser at April 20, 2008 10:44 AM

Larry: Yes, it works well, until the interest rate on the credit card goes up (or, the teaser rate resets on the mortgage).

brad setser: I will defer to you on best-guess of the Treasury holdings of the rest-of-world. Taking your presumption, interest payments should not decline substantially as short interest rates decline.

Posted by: Menzie Chinn at April 20, 2008 12:35 PM

So, once again the comments seem to confirm a truth: China owns America (in every respect), and it will soon decide to cut America off, which will destroy the United States and, of course, have no appreciable impact on China. They will find someone else to buy several hundred billion in goods annually without missing a beat, and unlike US dollars held by Americans, those held by the Chinese have their value protected by ancient magicks.

Posted by: mm at April 20, 2008 01:15 PM

mm:

Those who have the factories and the manufacturing labor possess the option of distributing the output among those who produce it.

Those who earn their livings by printing partially-valueless pieces of paper of various types are in a whole different circumstance entirely.

Posted by: esb at April 20, 2008 01:33 PM

Since this is April 20, I assume that the contents of this post are not an April Fool’s joke.

Did the federal fiscal year suddenly change? 2008 Q4 hasn’t yet arrived: it is July, August, and September. The article acts like we’ve already experienced 2008 Q4.

I also note the bizarre caption under the first figure: “Source: BEA, NIPA release of 27 March 2009, Table 3.2, and St. Louis Fed FREDII.”

I don’t know how Econbrowser got financial information from the future. Could you ask them to send us the stock prices from March 2009?