The increase in the interest bill of the US government is an underreported story.   The CBO reports that FY 2006 interest payments will be about $40b more than FY 2005 payments.  And that trend is set to continue.  From 2001 through 2004, falling interest rates – and a strategic shortening of the maturity structure of the US debt stock (see p. 11 of this document) by then US Treasury Under Secretary Peter Fisher – reduced US interest payments even as the US debt stock rose.

The chart (link) in the Gross story tells the story. 

We in the US are now starting to pay the price for the run-up in our debts. In two senses. 

• Rising rates and a rising debt stock are combining to increase the US government’s interest bill.
• And, as Dan Gross notes in his article, a lot of those interest payments are going to the United States external creditors.  That is only fair. Massive purchases of US treasuries by foreign central banks from 2002-2004 helped keep long-term rates, not just shor-term rates, low.  As a result, foreign creditors now own a majority of marketable US treasuries. 

It is often argued that higher interest rates won’t have much of an impact on US households, at least in aggregate.   Sure, some folks will have to pay more on their ARM (especially once the low teaser rates expire), but others will get more interest on their bank deposits.   In aggregate, it is a wash – some are hurt, others gain.

It is kind of like the interest the US Treasury pays the Fed on the Fed’s holdings.  Most of it comes back to the Treasury, as the Fed gives its operating profits back. 

Not so with the rise in the interest rate on US debt held abroad.  That is just a net drain on the economy.