Interest expense as a percentage of government, this year, if the MTS thus far is 9/12ths of the total (through June), will run $515 billion. This out of a budget of $3.8 trillion (approximately) is ~14% of the total federal budget. To put this in perspective this is about 50% of the total receipts under federal income tax - just to pay interest!
Now I'm probably being pessimistic, because there's a roughly $80 billion "whack" that comes from semi-annual coupon payments in the trust funds, and we've already gotten both of those. So let's be nice and call the trust fund interest accrued already, which means we now get $249 + $199, or $448ish, which is about 12% of the budget.
And that assumes that neither interest rates go up due to an improving economy or a downgrade.
What happens if that 3% blended rate goes up 70 basis points on a downgrade? Oh that's easy - just multiply that number by 123% and you're close enough. Call that $551, or ~$100 billion a year more. Each and every year for the next ten, that's $1 trillion.
The problem is that the downgrade cannot be avoided without an actual credible $4 trillion in actual reductions in the deficit from the baseline. This means you can't count anything that was already expected to happen like the wars being wound down.
It also means at least $400 billion in actual spending reductions for FY 2012 and then $400 billion more in each of the next three to four years! Or we can just do it in two - $750 now and $750 in FY2013.
We might get away with either of those plans, although the impact on the economy will be very significant - the exposure of the Depression we have been in since 2008 will occur with certainty. GDP will contract and coverage - that is, the percentage of federal income that goes to interest - will actually go up for a while rather than down! It has to because as the economy adjusts to the lack of deficit spending GDP will contract and tax revenue will fall.
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