US debt interest becoming one of government's biggest expenses

Interest on the United States's national debt is on course to eclipse even the biggest proponent of the federal budget: defense spending which will amount to $900 billion this year.

Yahoo Finance Senior Columnist Rick Newman sits down with Market Domination to break down this frightening figure as it becomes one of the top three biggest challenges to balancing the national budget.

For more expert insight and the latest market action, click here to watch this full episode of Market Domination.

This post was written by Luke Carberry Mogan.

Video transcript

The US faces a grim milestone when it comes to the federal budget.

Our own, Rick Newman is here to explain, Rick.

I watch these numbers pretty closely every month.

Guys.

The treasury puts out a monthly statement statement and it looks like something is gonna happen for the first time this year, which is that uh payments on the national debt, which is called net in net interest payments.

That's what the government has to pay to borrow.

It looks like that is going to be higher than defense spending.

Uh this year for the first time, it's also gonna be higher than Medicare spending.

So just a couple of years ago, this was the seventh biggest category of money going out the door in Washington DC.

Now it has risen to number three.

And we basically know why that is number one.

The gov, the government is just borrowing incredibly large amounts of money.

And second, uh the interest rate the government pays has been going up because interest rates overall have been going up.

The government has to pay market rates when it borrows money.

Uh It pays those interest rates to consumers us investors uh and we're getting more for our money these days.

So this is an unsustainable problem, like many other uh parts of the federal budget situation, but not surprisingly, nobody in Washington really wants to address it any time soon.

Well, so Rick, what are the implications of that?

I mean, you say it's an unsustainable problem, there's a lot of quote unquote, unsustainable problems that have been going on for a long time.

So they seem pretty sustainable.

So like, you know, what, what, what are the implications of this?

What happens as a result of this?

Well, I mean, we've started to see the, the process.

I think it's gonna be a slow process, but uh we've seen uh a couple of downgrades of the US credit rating.

That's one example.

The first one came in 2011 and then not much else happened until last year when we saw a couple more downgrades.

Uh The thing that is going to force politicians to deal with, the problem is going to be an adverse market reaction.

It's going to be uh when investors and when financial markets just come to the conclusion that the fed is, excuse me, the Treasury department is issuing too much debt.

Uh and that there's increasing question about the creditworthiness of the United States its ability to pay and that is gonna force interest rates higher.

Now, we, we saw a few wobbles in the market for treasuries uh during a couple of auctions last year and the Treasury department changed, uh, some of the things about the way it ran those auctions and it seemed to straighten things out.

But that was, I mean, a lot of people think that was a warning sign.

Uh, we saw interest rates going a little bit higher than markets, um, would otherwise have driven them last fall.

And that is what a debt crisis is gonna look like.

Now, the treasury seems to have um gotten that problem under control for now, but that was a hint of it and when it happens big time, uh that is going to be the thing that forces uh the the politicians in Washington to deal with it.

Nobody knows when it's gonna happen, but it is probably gonna happen.

Well, we've seen it happen in other places uh that have been on similar paths.

So Rick, thank you very much.

Appreciate it.

Bye guys.