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The Economy: “How The Monster We Fed Will Now Swallow Us”

Thursday, March 8, 2018 14:49

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“All Fed Up On Peak Debt:

How The Monster We Fed Will Now Swallow Us”

by David Haggith, a.k.a. Knave Dave

“We are now ramping up government debt by orders of magnitude at the same time when interest on our mountains of debt will easily rise to 4% in about two years. I come by that number partly from the present rate of interest rise but mostly from the fact that the Fed is moving out of controlling the cost of debt, and will be doing so at a faster rate in the months ahead. (That is, if it stays with the program it has promised; and if it doesn’t, we simply have QE forever.) Mostly I come to it because 4% is the low side of what interest on the debt has historically been when the Fed wasn’t sopping up all government bonds, bills, and notes.

Interest rates have clearly started moving in that direction, tickling the toes of 3% almost every week. So, anticipating one more percent within two years is a conservative estimate since the cost of debt is far from priced in, having been artificially regulated down by the Fed for nearly a decade. The movement in 10-year and 30-year yields last month was the beginning of pricing in the Fed’s flight from financing the government, not the end. (I actually think it will rise a lot faster than that. I would not be the least surprised to see the 10-year yield hit 4% this year, but I’m being conservative in my predictions for where it is headed.)

Getting back to the low side of normal for interest on the national debt will increase the cost of maintaining that debt by a minimum of 50% over two years, and whatever happens to government interest rates always impacts consumer rates to an even higher degree. So, existing credit cards with variable interest, mortgages with variable interest will easily double in cost on levels of debt that many already find hard to manage. At the same time, new credit cards and mortgages will become so expensive that consumption will slow, not grow; housing will fall, not stall.

(Peak debt also includes corporate debt, but that could be alleviated by the government corporate tax cuts if those cuts are put toward paying off corporate debt. Peak debt also includes margin debt and other forms of debt within the stock market in addition to individual consumer debt and all of that government debt. I refer to all of those as “peak debt” because they are all at record high levels where any change in interest will have enormous impacts. Because interest on all of that debt is minuscule by historic standards, it is easy to double it. Small numbers double more easily than large ones.)

A rise to the low side of normal for government bond interest will likely put interest payments alone on the national debt at a $1 trillion a year by the end of this decade (because the debt will also rise by another $3-4 trillion by then with all new debt being financed at the higher rates and all rolled-over debt being financed at those rates, and most of the US debt is short term, so will roll over soon).

The time (end of 2020), then, is not far off when the entire newly normal trillion-dollar deficit will be consumed just to pay interest on the debt. Whether inflation drives interest up or the Federal Reserve’s unwind or the Republican’s new normal of trillion-dollar annual deficits or the president’s proposed fiscal stimulus plan, the concern that is shaking markets is ALL about lethal levels of interest coming to our already monumental mountains of debt.

Of course, the overarching truth here is that we may not even get there because the economy will start to collapse well before then.

So, that is why I call our present state “peak debt.” The snowball is speeding up and building in size so quickly now that there is no political possibility of stopping it before it crushes us. In the past two months alone, we’ve seen the rate of increase in debt and the weight of interest on the debt grow simultaneously at new-normal speeds never before seen. It’s not going to stop because Congress isn’t going to reverse its drop-taxes-and-add-spending plan, and the Fed is not going to stop getting out of government bonds – not, at least, until it is too late – because both entities believe they can do what they are doing. It is religious dogma with them.

The path of floating the economy upward with ever growing debt expenditures was always unsustainable economically because you cannot increase the rate at which you are piling on debt forever. That unsustainability has been the enduring theme of this blog. When I began the blog, it was remotely possible we could change course and avoid collapse. Now, with the sudden rise in long-term interest rates, breaking free as the Fed stops suppressing then, we are entering the final days when all of that debt will consume us.

David Stockman, who has often written about peak debt, warns, “Whatever expansionary impulses that do remain in the U.S. economy are about to get smothered by the impending collision between soaring debt issuance by the U.S. Treasury just as the Fed prepares to dump upwards to $2 trillion of existing debt securities into the bond pits…. The punters on Wall Street have been so addled by years of Fed monetization of the public debt that they now think rising yields are a ‘good thing’ and reflect rebounding economic growth. No, they don’t! There is literally no way out of the fiscal trap now rapidly unfolding in Washington – short of a thundering financial collapse.” (NewsMax)

Stockman also noted that congress’s new cut-taxes-and-engorge-more plans mean the federal debt will swell to $35 trillion in ten years. That is a debt mountain that is 30% more than the entire economic output of the United Sates, and that figure only includes the on-budget stuff, not social security, war, disaster relief, etc. The Committee for a Responsible Federal Budget agrees and even says 35-in-10 is the optimistic scenario.”

Full article, “All Fed Up On Peak Debt”, is here:

- http://thegreatrecession.info/blog/fed-up-on-peak-debt/

Source: http://coyoteprime-runningcauseicantfly.blogspot.com/2018/03/the-economy-how-monster-we-fed-will-now.html

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