These Two Charts Might Change Everything You Believe About The National Debt

The chart is simple, but first, many people believe that as the national debt surges, our borrowing costs should surge. This will show that in fact it’s the opposite.

The blue line (measured on the right-y-axis) is the total size of the national debt. The red line (measured on the left y axis) is 1 divided by the yield on the 10-year Treasury rate. So basically, as US borrowing costs fall, the red line rises (math).

debt vs. rates

Business Insider, FRED

There is a large contingent of people who think that as the national debt spirals higher and higher, so too should our cost to borrow money. Not only is this currently untrue (or borrowing costs have never been lower), but our borrowing costs have fallen steadily alongside the rise in our national debt.

This is incredibly important, because it busts the notion that the only reason that the US borrows money cheaply is because there’s a crisis going on in Europe, and that the US is the “cleanest dirty shirt” or the “Prettiest girl at the Ugly Pageant” or whatever other nonsense explanation you want to use for low rates.

The debt has been rising powerfully for the last 30 years, and yields have been falling accordingly.

If we zoom in to a narrower time-slice on this chart, you’ll see the same idea in action.

Here’s a chart just of the Bush years. Again, the red line is 1 divided by the 10-year-rate. In this case, the blue line is the year-over-year change in the size of the national debt.

It is beautiful the way the the yield (red line) moves along with the debt. When the national debt explodes during the financial crisis at the end of Bush’s second term the red line soars to the moon (meaning yields are collapsing violently).


So not only does more debt not mean higher borrowing costs, the correlation is just the opposite. Higher national debt = lower borrowing costs.

Now here’s where someone chimes in with the old saw: correlation does not equal causation. And that’s true! But the factors that cause our debt to explode are the same factors that cause yields to fall.

As we explained in a post in late May, US interest rates are a function of several things: Growth, inflation, demographics, propensity to save and and so forth. When growth is good, government borrowing costs would logically be expected to rise, since people will want to take risks and get a good return… not just park their money with a risk-free entity. When inflation is high, nobody wants to be locked up in plain vanilla fixed income securities. And as the population gets older, more people will opt for risk-free Treasuries, thus depressing yields.

Well all of those factors affect the debt as well. When growth slows, taxation dries up and the government spends more on welfare to the debt rises. As the population gets older, the government takes in less income tax and pays out more for entitlements and so forth.

So it’s very logical that yields on government borrowing would fall while the deficit explodes.

People who think that higher debts should lead to spiraling interest rates are getting it backwards.

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