How Much is 7% on $17 Trillion?

I've had a few requests as of late to explain how governments operate with debt...so here goes again.

When the U.S. government has no money in their checkbook, they call the U.S. Treasury and say, "Sell some more IOU's!"  The Treasury then prints up some paper called U.S. Treasury Bonds and/or Bills.  Next they publish an auction date, "We will be selling $10 billion worth of 10 year Bonds next Tuesday in New York.  Show up or bid on line."

Remember....all $17,000,000,000,000 are backed by "THE FULL FAITH AND CONFIDENCE IN THE U.S. GOVERNMENT."...meaning they aren't backed by anything but faith.

Now, back to the auction.  On auction day they open the bidding like any auction..."Who'll give us $10 billion in exchange for 5% interest?"  Maybe China raises their hand.  "Who'll give me 4%?"  Maybe then Japan raises their hand.  Maybe J.P Morgan bids it down to 3%...and so on and so on.

Now let's say that the bidding stops and 3% and there are no other outside takers.  HERE IS WHEN THE STRANGE THING HAPPENS.  If the rate isn't as low as the Federal Reserve wants it...they will then raise their hands and bid the interest rate down and buy them all for 1.5%, if that's their targeted rate.

Remember now, the Federal Reserve is not FEDERALLY OWNED PART OF THE GOVERNMENT and they have NO RESERVE.  So they literally just buy them with a promise...and they create the $10 Billion out of thin air with a signature.  Then the Treasury tells the U.S. Government that they now have $10 billion more in their checkbook...which will last for all of two days at current levels of spending.

"Question Dennis....what happens when the Federal Reserve has no more power to "buy" Treasuries and the auction has to go to the highest outside bidder?"

Good question....then Japan may get them for 4%....meaning the U.S. government will have to start transferring money out of the USA and into Japan's checkbook at the rate of 4% per year.

So if interest rates are currently at 1.5% on the $17 Trillion....and we can't balance our budget now....won't that be CATASTROPHIC if the interest rates go back to their long term average of over 6%?

Of course the answer is....yes.  It will be catastrophic...because our interest payments will exceed all of our other expenditures like military, Social security, Medicare, Food stamps, etc...and America will start to fall hard like Greece and soon Spain.

Witness Spain today, which is now close to being an issuer of "junk bonds";

Spain's borrowing costs have risen to another euro-era record, with lenders demanding a higher interest rate.

The yield on benchmark 10-year bonds hit 7% in early trade, a level which many analysts believe is unsustainable in the long term. It later fell back slightly.

It came as Moody's cut Spain's credit rating to one notch above "junk".

It was hoped that the bailout would help calm fears in the financial markets about the strength of Spain's banks and ease Madrid's borrowing costs.

However, Moody's said the eurozone plan to help Spain's banks would increase the country's debt burden.

Germany, the main backer of eurozone bailout funds, has been criticised for its insistence that debt-laden countries must persist with austerity and not be allowed to renegotiate their rescue conditions.

Mrs Merkel also said that world leaders should not "overestimate" Germany's ability to resolve the crisis, saying that the country's options for rescuing the eurozone were "not unlimited".

Here; http://www.bbc.co.uk/news/business-18438044

Could America soon be issuing "junk bonds"?  First Greece, now Spain, Portugal, Cyprus?  Where will it end?