NCPA - National Center for Policy Analysis

The Hidden Cost of the U.S. National Debt

June 3, 2011

Americans are paying a tremendous hidden cost for racking up so much debt so quickly. To uncover the amount of that hidden cost, consider how the people lending money to the U.S. government are coping with the risk of the U.S. potentially defaulting on the interest payments it owes the people, institutions and governments who have lent it money, says Craig Eyermann of the Independent Institute.

They are coping with that potential risk in two ways:  they're requiring the U.S. government to pay higher interest rates than it would otherwise have to if the amount of debt the government has taken on were not so large. They are also buying insurance that will pay them back in full should the U.S. government actually default on its debt payments, says Eyermann.

  • Before 2008, it was considered by bond investors to be highly unlikely that the United States would ever default on its national debt.
  • Today, it is still highly unlikely. However, that does not mean that the potential risk of a default has not increased.
  • What we see is that a roughly 0.4 percent increase in the cost of insuring the U.S. national debt through Credit Default Swaps from the effectively default-risk free period before 2008 to today's not default-risk free levels would appear to have become a permanent, ongoing feature.
  • Major credit rating agencies are acting to downgrade the debt outlook for the U.S. from stable to negative, signaling that unless the U.S. debt trajectory changes in the next two years, they may have to begin lowering the U.S.' current AAA credit rating to confirm the increase in risk to lenders.

Source:   Craig Eyermann, "The Hidden Cost of the U.S. National Debt," The Independent Institute, May 26, 2011.

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