It is expected that the last two month’s of this fiscal year, interest costs will increase another $45 to $66 Billion. The total FY16 interest cost may be between $426 and $447 Billion.
In FY11, the Treasury paid creditors a record $454,393,280,417.03. (That’s $454 Billion)
With the debt at $19.4 Trillion (that’s 19,400 billions of dollars) what do you suppose the interest costs to the Treasury will be when the annual interest rate returns to normal? (Normal would be 4% to 6%)
In fiscal year 2015, the federal budget was $3.8 trillion. Of that amount only $1.11 Trillion was spent on what budgeters call discretionary items; food and agriculture, transportation, social security & unemployment & labor, science, energy & environment, international affairs, housing & community, veteran’s benefits, Medicare & health, education, government, and military.
The other $2.69 Trillion was spent on interest and what budgeters call mandatory items; spending on programs that are required by existing law. Medicare and Social Security are the two largest mandatory spending programs. They are about 40 percent of the federal budget. Agriculture, Defense, Education, and Veterans Affairs, also require mandatory spending.
As interest costs increase, either discretionary spending decreases or the annual deficit increases. Mandatory spending is unaffected unless Congress changes the law. Those mandatory checks always go out.
So, when interest goes from $426 Billion per year to $600 Billion per year, $174 Billion in programs that serve you and your neighbors must be cut. Or, Congress can increase the money supply to continue paying for the programs, which, as you would expect, will lower the purchasing power of your paycheck.
Of course, we could vote in new leadership and change the trajectory of government expenditures. But, for most of you, that’s way too scary.
I was up early this morning sifting through the market stories.
Middle East: crash
USA: set to open
There’s good news in all this loss. First, stocks were overpriced. At some point, they will bottom out and it will be time to start buying. Second, the Golden Age of the Central Banker seems to be over. And that is very good news.
The best financial blogger alive, Ben Hunt of Epsilon Theory fame, coined the phrase “Golden Age of the Central Banker.” His notes, combining investing with game theory, will make you smarter.
Since 2008, the world has believed that central bankers run the economy. That’s why the S&P 500 has been tracking the Fed balance sheet almost perfectly. It’s why markets ignore business fundamentals, good or bad, and move up or down exclusively in anticipation or reality of what the Fed will do.
There are many reasons for the economy’s lackluster recovery from 2008, but expectations that the Fed would do all the work for us was key. As long as The Bernanke or Yellen could snap their fingers and levitate my 401k, who cares? As long as CEOs could borrow money at zero interest and buy back their company’s stock, boosting their own compensation, why do actual work?
As a result of easy money, US corporations have taken on record debt while capital investment in plant, people, and equipment is at a record low. Think about that for a moment. We’ve learned since childhood that, if you must borrow money, borrow only things that hold their value or increase your marketability. We borrow for homes and eduction and the tools we need to do our jobs. We don’t borrow for consumption products and fun.
But that’s exactly what US corporations have been doing since the great recession: borrowing spending money for fun.
But the Wizard’s been exposed. If the Central Banks intervene to prop up markets, people will realize that all’s not well with the economy. If the Fed stays on the sideline (where it belongs), people will know that it’s time to do the work ourselves instead of waiting for the Fed to shovel money our way. But there will be pain for a while.
The crash of 2008 shifted bad habits from Wall Street banks to Treasury and the Fed. Those bad habits will eventually cost us. And that payback could be starting.
Are they going to peg all the banks? Why, they could buy ground and build a new Mississippi cheaper. They are pegging Bulletin Tow-head now. It won’t do any good. If the river has got a mortgage on that island, it will foreclose, sure, pegs or no pegs.
When I last checked the Internets last night, markets were booming in Asia, and US futures were soaring. All in response Turkey’s central bank, which raised its interest rate benchmark to north of 12 percent. Unheard of territory.
From ZeroHedge, on 01/28/2014 18:09 -0500
Judging by the reaction from SocGen and JPY crosses (and thus global equity markets), the Turkish Central Bank’s decision – to tighten aka ubertaper – has solved all the tapering, tantruming, turmoiling problems in markets. JPY crosses instantly exploded higher, automatically lifting US (Dow +60) and Japanese (NKY +110) stock futures markets before they closed.
The rate hike was meant to attract capital to into Turkey. With interest rates on “safe” investments–government bonds–remaining at historic lows, an offer 12 percent would seem like a windfall for people sitting on globs of cash (borrowed from governments).
But today’s bull market didn’t last. Again, from ZeroHedge.com:
I started this note with quotes from two prominently bearish money managers – Jeremy Grantham and Hugh Hendry – both of whom are throwing in the towel on the upward trajectory of the market in the face of inexorable government bond-buying. Their change of heart reflects (finally and begrudgingly) the overwhelmingly dominant Narrative of Central Bank Omnipotence, that for better or worse it is central bank policy (particularly the Fed’s QE policy) that determines market outcomes.
Experts Tamed the Mississippi 130 Years Ago, Don’cha Know
In Life on the Mississippi, Mark Twain takes readers up and down the Mississippi. He takes us on this trip as a historian, then as a young man in love with the river, and, finally, as an old man on a nostalgia trip to New Orleans.
We learn that between Twain’s last trip as a pilot on the Mississippi and the time of his later voyage, the Army Corps of Engineers has tried to tame the mighty river. But an old pilot, Uncle Mumford, offers Twain his opinion. The engineers are smart fellows, Mumford admits; smarter than he. And West Point taught them more about the river than Mumford could comprehend.
But the engineers didn’t live on the river the way Mumford had. They didn’t know the river. The learned about the river.
Mumford’s warning, “If the river has got a mortgage on that island, it will foreclose, sure,” foreshadowed the floods of 1993. That’s what inspired me to read the book, and that quote was the main learning I took from it. Warning of foreclosure stuck with me.
From a rooftop smoking lounge at work, we could see the price at QuikTrip. Every day in 2008, the price went up. Every day, we expected to see it fall. Finally, we all gave up because, according to the USAToday headline of June 12, 2008: “Oil Experts Contend High Energy Prices Are Here To Stay.”
But the experts were wrong. And shortly after those experts reached consensus, the market reversed. By the time trees were turning in the fall, that QuikTrip sign dropped under $1.50.
This chart shows gasoline prices in the US at key points during 2008. Remember, the experts reached consensus in June.
July 7, 2008—Crude oil prices settled-in at a new record of $147 per barrel. The U.S. average price for regular gasoline climbs to an all-time high of $4.11 per gallon. Road trip style vacations are put on hold for many summer travelers.
Sept. 15, 2008—The barrel continues to drop below $100 a barrel for the first time in six months. The idea of a serious financial industry recession is discussed as the market literally begins to melt down!
Oct. 16, 2008—Oil prices fall below $70 a barrel, which is less than half of its July peak. Signs of $1.99 a gallon gas brings celebration to the masses. Some consumers begin to talk about dragging out their gas guzzling SUV’s and Winnebago’s for the first time in months.
In the present case, the experts are central bank planners. They want to control the world’s economy. They believe their expertness allows them manipulate the economy any way they want.
But they can’t. No more than the Army Corps of Engineers could keep the Mississippi from foreclosing on its mortgage. No more than oil experts could keep the price of gasoline rising. No more than the Soviets could command a robust and growing economy with toilet paper for all.
Yes, power allows central planners to control aspects of the economy for periods of time. But the forces underlying the economy don’t stop moving. Pressure doesn’t stop building. It’s simply contained, like the water of a giant river, or the cap on a super volcano.
When outside forces that the planners can’t control or didn’t know about strike the planned economy, the dam bursts, the cap ruptures, the economy crashes.
I’m not sure we’re witnessing the rupturing of the central banks’ plan. This could be just a temporary blip.
Even if this isn’t “the big one,” though, the big one’s coming.
The central bankers have run up a massive mortgage that all the people alive on earth cannot repay in a lifetime. No central planner in history ever kept control forever, and no pegs ever kept a river in its banks for good.
In a column intended to attract readers, not to promote hard economics, Rotman University economist Richard Florida declares that home ownership is terrible for the US Economy.
The problem is, like many economists, Florida’s understanding of home ownership is 180 degrees ass-backwards. Florida thinks that home ownership is supposed to cause economic growth.
Instead of leading to economic development, higher rates of homeownership today are associated with lower levels of it.
No, professor. Home ownership is the reward for economic growth in healthy systems. In the 1990s and 2000s, however, government mandates more or less forced people to buy homes and forced banks to lend to anyone. That drove up the home ownership percentage without the organic economic growth to justify it.
Once we unwind from 20 years of bad Washington policy, home ownership will once again signal a health economy and stable neighborhoods.
Now if you’d help us get government and crony big bankers out of the way, we’ll restore housing equilibrium and a vibrant economy in no time.