Another Brick in the Wall

The European Central Bank (ECB) has announced the possibility of an increase in their interest rate in April. This action is being taken preemptively to slow their rate of inflation. What are the consequences in the United States: 

  1. The Euro has risen 0.5% against the US dollar on this news. Further weakening of the dollar will occur based on the amount of the increase(s).
  2. Investors around the world will put their money into European bonds/accounts instead of US Treasury bonds.
  3. As investors flee US Treasury bonds, the Federal Reserve must raise the interest on our bonds in order to be competitive. This will have a direct impact on the interest that we currently are paying on our national debt.
  4. The threat of inflation is here but our government is constrained by massive debt and a supposed recovery to act responsibly. This means that the American citizen will be required to pay higher prices: inflation will become hyperinflation. 

Our national debt without unfunded mandates is $14.265 trillion. As this debt is refinanced at higher interest rates, the portion of our national budget appropriated for interest will increase. For every 1/4% increase in interest rates, the federal government will pay an additional $35.6 billion per year. 

The budget compromise currently being reported includes $33 billion in cuts instead of the promised $100 billion pledged by the Republican Party last year. I would expect at least a 1% increase in the interest rate by the end of this year. Imagine what a 2-3% increase in interest rates will do to our budget. 

David DeGerolamo

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