Interest on the Debt as a Share of GDP

Think of it this way

It is the part of the paycheck that goes to paying credit card interest before buying anything. It cannot be cut without defaulting.

What is Interest on the Debt as a Share of GDP?

What it costs each year to pay the interest on outstanding debt, in proportion to the economy. It is the link that closes the loop this whole section talks about: more debt forces more interest payments, interest is spending, more spending widens the deficit, and the deficit forces more debt issuance.

How to read Interest on the Debt as a Share of GDP

It depends on two things at once, and they should not be confused: how much debt there is and at what rate it was issued. It can rise with debt standing still if rates rise, and it can fall with debt growing if rates fall; the latter is what happened for much of the decades of low rates. The historical highs of this series are in the 1990s, not in the stretches of highest debt.

What Interest on the Debt as a Share of GDP means for the market

It is the item that turns a rate hike into a fiscal problem with a lag of years. Old debt is refinanced at today's rates as it matures, so the effect is not seen all at once: it comes in gradually, at the pace at which the old paper matures. Look at it together with the 10-year bond, which is what anticipates where this line is heading.

Where the money flows

Interest leaves the Treasury's account and enters the account of whoever holds the bond, so it injects money just like any other spending. What sets it apart is that it is not a choice: it is imposed by debt issued years ago and by the rate at which it was issued. A government can cut roads or defense; this item it pays no matter what.

What to watch in Interest on the Debt as a Share of GDP

Compare it with the series' own maximum rather than with last year: that is what tells you whether the level is historically high or only looks high. And look at it against total spending to GDP to see what share of the budget it takes.

Interest is paid to the bondholder, so it injects money like any other spending. The difference is that it cannot be cut.