America’s Interest Bill Keeps Growing

One number in the U.S. fiscal picture deserves more attention: 3% of GDP.

That’s roughly where federal net interest costs have climbed, about double their level from several years ago.

And unlike many other areas of government spending, interest expense isn’t particularly flexible. Once the debt has been issued, the bill has to be paid.

What I find especially interesting is how the mechanism works.

For years, the U.S. benefited from extremely low borrowing costs. But as older, cheaper debt matures and gets replaced with new debt carrying higher rates, the average interest rate paid on federal debt gradually rises. Interest costs can therefore remain elevated even if the Fed eventually cuts rates.

The Treasury is essentially replacing yesterday’s cheap debt with today’s more expensive debt.

And given the sheer size of U.S. debt, even relatively small changes in average borrowing costs translate into enormous amounts of money.

That’s one reason I keep coming back to gold when looking beyond the next Fed meeting or inflation report.

Gold doesn’t need a fiscal crisis to perform well.

An environment where governments carry large debt loads, interest consumes a growing share of public finances, and policymakers face increasingly difficult choices between higher taxes, spending cuts, more borrowing, or easier monetary policy is already an interesting backdrop for an asset with no counterparty risk and no government liability attached to it.

The interesting question is what happens over the next five or ten years if debt keeps growing while the cost of servicing it remains structurally higher than it was during the zero-rate era.

For me, that’s another piece of the long-term case for holding physical gold.

Not because something has to break tomorrow.

But because the direction of these numbers is becoming increasingly difficult to ignore.