[FONT=times new roman,times]The Four Answers[/FONT]
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The next step is to correct their answers by crossing out what they've written and, beside them, write down the right figures. They are:[/FONT]
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1) Total spending for the federal budget for 2010 is projected to be approximately [/FONT]
[FONT=times new roman,times]$3.6 trillion[/FONT][FONT=times new roman,times]
. The budget comprises total expenditures and total receipts by the federal government.[/FONT]
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2) The federal deficit for 2010 is projected to be approximately [/FONT]
[FONT=times new roman,times]$1.2 trillion[/FONT][FONT=times new roman,times]
. However, note that in 2009, the deficit was projected to be [/FONT]
[FONT=times new roman,times]$407 billion[/FONT][FONT=times new roman,times]
but ended up being [/FONT]
[FONT=times new roman,times]$1.4 trillion[/FONT][FONT=times new roman,times]
. The deficit is total expenditures less total receipts (such as incomes taxes) received. When receipts exceed expenditures there is a surplus.[/FONT]
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3) The National Debt at the end of fiscal year 2010 is projected to be [/FONT]
[FONT=times new roman,times]$14 trillion[/FONT][FONT=times new roman,times]
. This debt is the accumulation of every year's deficit since 1776 less all accumulated surpluses.[/FONT]
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4) The annual interest payment on the National Debt for 2010 is projected to be [/FONT]
[FONT=times new roman,times]$164 billion[/FONT][FONT=times new roman,times]
.[/FONT]
[FONT=times new roman,times]The Debt In 2015[/FONT]
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Underneath the four answers write: "The debt in 2015 is projected to total [/FONT]
[FONT=times new roman,times]$20 trillion[/FONT][FONT=times new roman,times]
."[/FONT]
[FONT=times new roman,times]The Extrapolation[/FONT]
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Explain that the interest the government pays (#4) on the debt (#3) is raised by selling financial instruments such as Treasury Bills to investors (such as the People's Republic of China). These financial instruments are currently paying about 1.5% interest which will result in the approximately $164 billion in interest expense to the federal government.[/FONT]
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Here's where it gets interesting. Remind your liberal that interest rates fluctuate (Remember when interest rates almost reached 20% back in the early ‘80s?) [/FONT]
[FONT=times new roman,times]as this graph demonstrates[/FONT][FONT=times new roman,times]
. Note this graph is the historical rates for 3-month U.S. Treasury Bills, one of the very instruments used to service the debt. Also remind your liberal that we are experiencing historically low interest rates which means that interest rates have only one direction in which to go.[/FONT]
[FONT=times new roman,times]Treasuries At 6% Paying Today's Debt[/FONT]
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Then ask what he thinks will happen to interest rates if China and other purchasers of American debt stop buying and what we would have to do in order to attract them back: will rates go up or down? Ask your liberal: "if interest rates on treasuries go up to just a modest 6% -- which is more than triple what the current interest rate we are paying now - what will the annual interest payment be on just today's approximately $14 trillion national debt?" Here's the math:[/FONT]
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$14,000,000,000,000 X .06 = $840,000,000,000.[/FONT]
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That's a $840 billion annual interest payment on the current National Debt.[/FONT]
[FONT=times new roman,times]Treasuries At 10% Paying Today's Debt[/FONT]
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But interest rates can easily go up to 10%...after all we've seen much higher rates within our lifetimes. What would the annual interest expense be on the current debt level if we had to pay 10% a year in interest:[/FONT]
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$14,000,000,000,000 X .1 = $1,400,000,000,000.[/FONT]
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That's $1.4 trillion in annual interest payments on just the current National Debt.[/FONT]
[FONT=times new roman,times]Treasuries At 6% And 10% In 2015[/FONT]
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But we're told that at projected deficit levels the debt will reach $20 trillion in just 4 years. At 6% and 10%, the annual interest payments on the debt would be:[/FONT]
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@ 6%: $1.2 trillion[/FONT]
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@ 10%: $2 trillion[/FONT]
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Note that the above two figures just service the debt; they don't reduce the principal of the debt. Note also that $2 trillion represents more than half of all current federal spending.[/FONT]