U.S. Debt at Record Highs, But Interest Rates at Record Lows

Chris Gaetano
Published Date:
Sep 11, 2020
While the amount of debt that the United States took on to respond to the pandemic is certainly eye-popping, Bloomberg notes that the cost of this debt is actually cheaper than it has been in years, indicating that the country is far from reaching any sort of upper limit on borrowing.

The national debt made headlines last week for reaching heights not seen since World War II, to the point where it now exceeds the country's entire economic output, considered by many to be a grim milestone. At the same time, however, Bloomberg noted that interest rates on this debt have fallen to lows not seen in more than half a century, down by 10 percent this fiscal year.

This is reflected in bond yields, which were already extremely low before the pandemic, falling even further afterward, going from an average of 2.4 percent in December to 1.7 percent now. What's more, many of the bonds used specifically to fund the pandemic response were in longer-term notes that allow the government to lock in these low rates even if interest climbs later on.

Bloomberg noted that markets don't seem particularly perturbed about this situation, as demand for Treasury bonds remains strong, and even were this not the case, the Federal Reserve has already pledged to buy as much U.S. debt as is necessary to stabilize the economy. The central bank has already bought $1.8 billion of the $3 trillion of new bonds the government issued since the pandemic, and is currently buying about $80 billion more every month.

Skeptics say these low costs are only temporary and that the country cannot afford to assume it can borrow its way out of its problem; it is this thinking that has animated much of the Republican opposition to an expansive coronavirus aid bill in favor of the much cheaper "skinny bill" that failed in the Senate yesterday. Bloomberg noted that, on the opposite end, proponents of Modern Monetary Theory—the idea that, because money technically is nothing but a wide-scale social agreement with no real ontological weight, a country that controls its own currency can never go broke, and so deficits don't matter—believe that recent central bank actions that effectively magicked money into existence (as proponents note it typically does all the time just not on as wide a scale) have vindicated their beliefs and so advocate even more spending.

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