Friday, March 20, 2015

The very first Quote of the Day!

LaughingTarget has the honors! :) Thank you sir, for this excellent explanation of the trap the FED has created.
The elephant in the room is public debt. The Federal government leans heavily on short term debt instruments and rolls them over year to year. 
On page 19, it shows the maturity schedule by year. Most of it is due by 2019 with a huge portion of it due this year. The average interest rate in 1989 was close to 9% and has been driven down to 3% this year. With the tremendous debt load on the books, if rates rise, it will create a major fiscal problem for the Federal Government. Current debt servicing is running $443 billion, or 10% of the total annual spending. If rates rose up to the 1980s average, debt servicing would be 25% of all spending just at the Federal level. 
It would additionally cripple municipalities that rely on short term rollover debt as well. The Federal Reserve has incentivised huge debt loading over the past decade and any attempts to return rates to relative normal will destroy numerous governments and undermine a large portion of the Federal level's programs. 
Despite what everyone wants us to believe, the Federal Reserve is not independent. With these huge debt levels hanging over our heads, the chances the Fed will raise rates are slim. They'll continue to use every excuse in the book to avoid admitting that they fueled government debt and don't want to be the cause of the reduction or elimination of redistribution programs.
Yes, that sums it up quite nicely. They have created so much debt, that increasing the rates on borrowing would destroy the system. It will happen much faster than anyone most people would believe, given the annual turnover is close to 10 trillion. Even though they've been pushing for longer turnover since the crisis began, an increased interest rate fueled sovereign debt crisis could not be held off for more than one presidency.

Fixed GAO audit link, and adding the following:
For fiscal year 2014, interest expense incurred totaled $433 billion; [~2.4%] this consisted of interest expense on debt held by the public of $260 billion, and $137 billion in interest incurred for intragovernmental debt holdings. [Social Security and Medicare]
Investors may be piling on US treasuries right now, but that will only last while the US looks like the best ship in a sinking fleet. If our average interest rate rises to 4% we would need to divert an additional $300 billion towards the interest payments. In the meanwhile, we continue to overspend, so the number will continue to rise. Without balancing our budget, there is no way out of the hole - remember the last time we were close to balancing our budget the Federal funds rate was over 6%, and so was the average interest payment.  Today a 6% interest payment would cost $1 Trillion! That means we have less than $1.5 trillion of revenue remaining for spending on programs such as the military, medicare, and social security.

Something's got to give, and something WILL give. Reality is, and always has been, unforgiving. We are in for a lot of pain in the very near future. It won't be decades, probably not even one decade.

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