You probably learned in your high school economics class (do they still teach economics in high school?) that too much government borrowing leads to sky-high interest rates. It’s Economics 101.Â
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The U.S. federal budget deficit has driven interest rates ever higher over the last five years.
- 2024: $1.83 trillion, the fifth year in a row with a deficit over $1 trillion
- 2023: $1.7 trillion
- 2022: $1.375 trillion
- 2021: $2.78 trillion
- 2020: $3.13 trillion, the largest in U.S. history
The government is first in line at the borrowing window in the form of treasury bonds. You come second to borrow for your new house or car. The more the government borrows, the higher interest rates go.
The Department of Government Efficiency (DOGE) has been at work for a little more than a month, and we’ve already seen some positive movement on interest rates.
“The 10-year interest rate has fallen by half a percentage point in the past month—from approximately 4.8 percent to 4.3 percent,” reports Reason’s Jared Dillion.Â
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Several factors, including inflation and economic growth, determine interest rates. Perhaps most important is the supply and demand for government bonds. The expectation of more or fewer bonds needed partially determines that. In this case, investors are betting that DOGE can successfully trim enough government spending to lower the amount that Washington has to borrow.
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If the government hadn’t borrowed so much money during and after the COVID-19 pandemic, it’s likely that mortgage rates right now would be lower—perhaps significantly lower. The typical 30-year fixed-rate mortgage is about 7 percent at the moment. If mortgage rates were one percent lower, the monthly payment on a $400,000, 30-year mortgage would be about $260 lower. This is the impact the deficit has on your personal finances.
Pierre Poilievre, the leader of the Conservative Party of Canada, has relentlessly attacked Prime Minister Justin Trudeau’s deficits and bloated bureaucracy. Poilievre has managed to translate out-of-control government spending into language everyone can understand—the “crowding out” effect results in higher debt service payments for you.Â
Poilievre, who would become Canada’s next Prime Minister if the Conservatives win a majority government in the upcoming election, was winning on this message for a while. However, when President Donald Trump said that he was going to annex Canada and threatened punishing tariffs, Canadian citizens rediscovered their sense of patriotism, and sentiment has since swung back towards the incumbent Liberal Party. The election now remains a toss-up.
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 “The bond markets do not currently reflect the savings that I’m confident we can achieve,” DOGE chief Elon Musk said on X. “If you’re shorting bonds, I think you’re on the wrong side of the bet.”
Bloomberg notes that the 10-year Treasury rate is the best real-world indicator of the cost of money for ordinary Americans.
As powerful as the Federal Reserve is, with its control of short-term rates, and as much sway as it has on stock market sentiment, it’s the 10-year Treasury rate that largely determines the cost of money for homebuyers and the biggest US companies. Bring that rate down and it’ll pave the way for millions of Americans to buy the house they’ve wanted for years and, in the process, stoke faster economic growth and curb the alarming surge in the government’s annual interest tab.
The more successful Musk is at cutting government spending, the less the government will have to borrow, and the cost of money will come down.
