Low Interest Rates Hid True Cost of Increasing Debt

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House mortgage-type instrument suggested as means to pay off national debt

Guest Post By Lee A. Presser

Interest rates have been held artificially low by the Federal Reserve since 2008.  This has had the effect of hiding the true cost of increasing debt.  As interest rates rise back toward 4%, the U.S. Treasury will have less money to spend on discretionary governmental functions.

The FY 2015 budget is approximately $3,900,000,000,000.00.  Another way to look at that number is about $12,187.50 per person for all 320,000,000 people in the U.S.

The $3.9 Trillion budget has been divided by the Treasury into three main categories; mandatory spending, discretionary spending, and interest costs.  In FY 2015 mandatory spending will equal 65% of the budget.  Mandatory spending is America’s entitlement programs.  Discretionary spending is everything else including the military, except interest costs.

The interest amount paid on the United States national debt may be about to sky-rocket as interest rates in the U.S. return to 4%.  Instead of paying $430,812,121,372.05 interest at an average 2.401% rate as the Treasury did in Fiscal Year (FY) 2014, the amount may soon grow to $769,861,040,000.00 if rates return to 4.188%, the average rate at the end of FY 2008.  (Treasury Department websites http://www.treasurydirect.gov/govt/reports/ir/ir_expense.htm and http://www.treasurydirect.gov/govt/rates/pd/avg/2008/2008_09.htm)

The $769.8 Billion calculation is based on the debt amount as of September 30, 2014.  The actual amount of interest paid when rates return to 4% will be based on a larger amount than the $18 Trillion owed September 30, 2014.  When the amount owed reaches $20 Trillion, the annual interest amount paid could be as high as $855,401,140,000.00 (based on a 4.188% rate rather than a 2.401% rate).

 A debt generally refers to money owed by one party, the debtor, to a second party, the creditor. Debt is generally subject to contractual terms regarding the amount and timing of repayments of principal and interest.

(Wikipedia http://en.wikipedia.org/wiki/Debt)

National debt is the money owed by the central government (in this case the United States Treasury) to its creditors; those who loaned it money at interest.  The national debt is different than the annual deficit.  The deficit measures the amount the debt has increased from one year to the next year.

The interest rate paid by the U.S. Treasury on its debts varies depending on the contract it signed with each creditor.  The “interest bearing debt” generally falls into two categories; “marketable” and “non-marketable” securities.  The average interest rate of all the subcategories making up the “marketable” and “non-marketable” securities is called the interest rate on the “Total Interest Bearing Debt.”

At the close of FY 2007, the “Total Interest Bearing Debt” rate was 5.009%.  By the close of FY 2008 the rate declined to 4.188%.  At the close of FY 2014, the “Total Interest Bearing Debt” rate was 2.401%.  (Treasury Dept. website http://www.treasurydirect.gov/govt/rates/pd/avg/2014/2014_09.htm)

 

When interest rates rise and the debt continues to increase (because of deficit spending), the United States Treasury has less dollars to spend on discretionary governmental functions.  Since interest must be paid to avoid default, discretionary spending must be cut.  The other option is to increase the deficit and add to the debt.  A larger debt results in increased interest costs in the coming Fiscal Year.

 

A change in trajectory is needed to avoid financial disaster.  Perhaps the solution is to assign the federal debt to a 30-40 year mortgage and pay it off like a house payment.  As the debt amount declines, more money will be applied to principal.  Of course, no addition debt can be added.  Increased expenses must be paid from current income and/or from increased taxation.

 

If Congress cannot agree to control itself, financial disaster is predictable and has been explained above.

Here’s How I’m Voting August 5 (with printable grid of ballot measures) *Update*

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You’d think being a political animal of sorts, election season would be my favorite time of year.

It’s not. I hate elections.

I hate the crappy, predictable radio ads (above all else). I know, they do it because it works. Well, not really, but I’m not going to give a free marketing statistics lesson here. (No one has any idea if the campaign formula works, because no body ever tries anything different.)

When Will Consultants Study Science?

There are scientifically indicated ways to increase voter turnout and scientifically indicated ways to influence undecided voters, but they’re seldom used, mostly because they’re hard work. Instead, consultants do the same things over and over for safety. It’s pretty simple: if a consultant tries something different and the candidate loses, people will blame the consultant for trying the novel “unproven” new approach. So consultants trot out crappy conversational radio commercials and rooster calls. I’m sure the consultants know it’s not scientific and probably doesn’t work, but it’s safe, and Republicans LOVE safe. So do Democrats.

Someone actually did try some scientifically indicated election methods. The Democrats in Colorado about a decade ago, and they turned a Red state Blue. But they also displaced a lot of traditional Democrat consultants in the process, as if that’s a bad thing. It’s chronicled in the book The Blueprint, which everyone who actually does like elections must read. (You might also try Victory Lab while you’re reading about scientific election tactics.)

The Moment No One’s Been Waiting For

I tell you all this to let you know that I HATE writing these posts. I don’t expect anyone to blindly follow my example, especially considering my example could get you arrested in Scotland. (Fodder for another post.) I’m not mentioning uncontested races except for State Auditor, because Tom Schweich is decent enough of a guy to actually ask me for my support and vote. (It’s very refreshing that he doesn’t assume.) So here’s my list:

State Auditor: Tom Schweich

County Executive: Tony Pousosa

US House, 3rd District: John Morris (not my district, but people keep asking)

Now, for the ballots. Here’s a link to a printable copy of this list. You’re welcome to copy and distribute as you’d like.

Title Subject Description My Vote Comments
Amendment 1 Agriculture Guarantees farmers and ranchers the right to engage in their livelihoods, produce food for others MEH Don’t get worked up about this one. I get the point of this amendment, but it’s so vague and meaningless I expect the courts to rule it null and void.*
Amendment 5 Firearms Establishes the right to keep and bear arms, ammunition and accessories YES This is a great amendment. Good job, Ron Calzone.
Amendment 7 Taxes Increases state sales and use taxes for 10 years to fund transportation projects NO Missouri has the seventh or eighth best roads in the country, and this money won’t go to repair roads and bridges, anyway. It’s been earmarked for parks, greenways, bike paths, and airports.
Amendment 8 Lottery Creates new lottery ticket with profits going toward veterans’ programs NO I’m a veteran. Veterans are great. But lotteries are regressive taxes designed to fool people who can’t do math. Have the courage to raise a tax or don’t. Stop tricking people.
Amendment 9 Civil Rights Protects electronic data from unreasonable searches and seizures YES This amendment might not stop the NSA, but I’m voting for it, anyway.

If I were Heritage Action, I’d key vote Amendment 5, Amendment 7, and Amendment 9. Vote the wrong way on just one, and you fall below the House Republican average. So be careful out there on August 5.

Also, there’s a Libertarian in many, many races in Missouri. Most are unopposed. If the GOP candidate is unpalatable, there’s no need to vote a straight party ticket. Just sayin’.

UPDATE: People are wondering just what I mean by “meh” on Amendment 1, so here’s the deal. This amendment is so meaningless that voting for it shows a disrespect for the law and for the Missouri Constitution, so I’m going to vote no.

On the other hand, if someone can convince me that Amendment 1 legalized hemp farming, I’ll vote for it.

******** original post continues*******

Now, some bonus material.

How To Make Someone Vote (Even If They Don’t Want To)

Don’t forget, if you want someone to vote, here’s the conversation you need to have:

“Do you see yourself voting next Tuesday?”

The will likely say “yes,” even if they don’t even know there’s an election. And use the phrase “seeing yourself” because it forces them to visualize the act of voting, like saying “don’t think about a pink elephant.”

“Do you know where your polling place is?”

They’ll say “yes,” because they don’t want to look stupid.

“What time do you think you’ll vote?”

This forces them to plan and commit to a time of day. And it reinforces their visualization of voting. And finally:

“What will you be doing immediately before you go to vote?”

This causes their minds to plan and organize their day around voting.

Research shows this 4-question method actually increases voter turnout. Almost nothing else works. I know it’s a bit convoluted, but it works. Here’s more

Even when we control for alternative sources of similar behavior, such as having the same income, education, ideology, or level of political interest, the typical subject is about 15 percent more likely to vote if one of his discussion partners votes. But does this influence spread beyond that to the rest of the network? As it turns out, we see a correlation between people who are directly connected and also between people who are indirectly connected via a common friend. In other words, if you vote, then it increases the likelihood that your friends’ friends vote as well.

Christakis, Nicholas A.; Fowler, James H. (2009-09-09). Connected: The Surprising Power of Our Social Networks and How They Shape Our Lives (p. 185). Hachette Book Group. Kindle Edition.

See you at the polls.

How is Obama’s Julia Like Pristomyrmex Punctatus?

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Before I answer that, a little science.

Scientists study all kinds of things. One thing they study is ants, because ants teach a lot about communities.

In a recent study published in Proceedings of the National Academy of Sciences, ecologists Shigeto Dobata and Kazuki Tsuji studied the effects of “cheaters” in a colony of Pristomyrmex Punctatus ants.

P. Punctati segment their society into two groups by age. Younger ants tend to hang around the house reproducing asexually. (And why wouldn’t they?) As they age, the ants reproduce less and take on other duties like foraging for food and repairing the home. In other words, they mature and become more responsible for themselves and for their communities.

Both behaviors are cooperative. Both help the colony at the expense of some personal sacrifice, though I can’t figure out what the kids give up by sit around reproducing day and night.

So what happens when scientists introduce a “cheater” ant or two?

Cheaters are like cooperators in all ways but one: cheaters don’t stop reproducing to go out and forage. In short, they don’t grow up.

But they do consume. And defecate. Right there in the house. And because their reproduction is asexual, the damn kids are just as horny and lazy as the parent.  Since cheaters reproduce more than cooperators do, pretty soon most of the colony is cheater ants. They eat, they sleep, they poop, and they  . . . reproduce.

Of course, this can go on only so long. As less food comes in and less waste goes out, the colony becomes filthy, poor, and overcrowded. The cooperators move out or die, leaving the cheaters to decay among their own filth.

Which brings us to the Julias of the world.

Julia was (semi) fictitious character sprung onto a waiting world by the Obama-Biden campaign. Julia is a cheater. From age of three, Julia sponges off the colony. From head start through social security, Julia eats the food others foraged and occupies the home others built and maintain.

Despite free birth control and copious, publicly supported family planning instruction, Julia, of course, reproduces. The Julia in Obama’s video never marries–or even dates–a man, so I assume she reproduces asexually, like her P. Punctatus ancestors. Which would explain the failure of birth control. Julia’s offspring, of course, imitate their parent. (Here’s a video about Julia from The Five.)

Think this cheater behavior is unique to ants? Think again.

Researchers have recently evaluated these questions in systems involving viruses and cells (where cells may secrete protective substances, or self-destruct to form a spore-dispersing stalk) but not in multicellular organisms before. Yet the results are so similar, write Dobata and Tsuji, that they believe universal principles are at play.

What is one of those “universal principles?” Cheaters eventually eat out the substance of their cooperative cousins and destroy their society.

This phenomenon seems to be near a tipping point among us humans in the US of A. The punctatus is among us.

Consider:

More than half of Americans depend on government subsidies

and

Nearly Half of All Americans Don’t Pay Income Taxes

And

Disability is the New Normal

And

Up to 4 out of 5 disability recipients are frauds

If only Mitt Romney had seen the ant study before his infamous “forty-seven percent” statement during the 2012 campaign. He could have substituted “homo punctati”  for “forty-seven percent,” and no one would be the wiser. A few ambitious reporters (if there are any) might have googled “homo punctati” and found nothing, since I just made it up by combining the word for man (homo) with the description of a type of ant (punctatus). But you get the point.

People are, of course,different from viruses and ants. We have intellects and imaginations that allow us to project the effects of cheaters on our human colonies. And we have the ability and the right to ostracize cheaters–to tear them off the teat, so to speak.

The question is, will we?

Our Tax Code: The Fustercluck From Which Everything Rancid Crawls

Reading Time: 4 minutes

William F. Buckley proposed a simple tax reform in 1973. The language barrier that separates people like Buckley from that odd species we call Congress prevented his thoughts from finding fertile soil.  And in the 40 years between, the tax code has become only murkier and more dangerous.

4-Reforms

“Our tax laws were,” Buckley wrote in Four Reforms: A Guide for the Seventies, “designed historically to raise revenue for the operations of government.”  He continues:

Along the way the operations of government inflated in purpose and ambition, evolving from modest Jeffersonian instruments for effecting the safety of the state into the gargantuan instruments of the social perfectionists.

He points out that attempts to cure a social ill through tax code always and everywhere exacerbates the ill and sprouts new seedlings of destruction. For example, the ill-fated luxury tax of the 1990s, which intended to punish conspicuous consumers who spent their hard-earned dollars on boats, planes, and furs, ended up destroying several American industries and displacing tens of thousands of not-so-wealthy workers. The rich, meanwhile, could import luxury items from Latin America, Asia, and Europe, often cheaper than their American equivalent even before the luxury tax took effect.

Here’s a little history of how we got here, and a reiteration of Buckley’s modest proposal of 1973.

At the height Roosevelt’s New Deal, only about 3 million Americans paid any income tax at all. But World War II changed all that. To feed the war machine, Congress broadened the tax base to about 42 million Americans, most of whom viewed their new tax burden as a) worthwhile, b) reasonable, and c) temporary. Most Americans had one or more family members fighting in Europe or the Pacific, and paying a portion of their income to fund the war effort was something of an honor. At the time, there was but a single tax rate paid by all Americans, married or single.

When the war ended, some states created “community property” laws which stated that wives were entitled to half the husband’s income. This led to a change in the tax law which allowed men to deduct alimony payments, which led couples to divorce for the tax advantage, which created scandals as more couples lived openly in sin.

So Congress amended the law again to allow married couples to pay separate taxes which tended to drop them a few rungs on the tax ladder, reducing their overall tax rate.  This caused overall government revenue to drop about the time General Marshall’s plan to rebuild Europe needed funding.

In 1951 then created the unmarried head-of-household allowing single working parents to pay taxes at a lower rate, as if they had a spouse who didn’t work. This perturbed the single taxpayers who wrote the Congressmen (they were almost all men then). 

As Buckley points out, at this point it should have become clear to anyone that “to favor somebody is almost necessarily to discriminate against somebody else.”

The single taxpayer complaints led to more reforms in 1969. Now, single taxpayers could not pay more than 20 percent more than a married taxpayer in the same bracket.  (Confused yet?)  Now, dual-income households in which both husband and wife worked were furious that they were paying more taxes than single people in the same tax bracket. Congress responded, but now couples with children complained that they were paying the same amount as childless couples, discouraging family creation and giving the childless unfair economic advantage.

And on we go, until in the latest fiscal cliff tax cut/increase/pork festival, NASCAR owner get special tax advantage to compensate for their inability to turn right.

So the tax code is now heavier than health man can bench press, the IRS cannot explain what you should pay, and businesses spend as much on tax avoidance as they do on research and development.

It’s time to stop the madness.

While some believe the way to drum up broad support for change is to propose radical elimination of the income tax altogether, scientific investigations of political change reveal that people prefer incremental and evolutionary changes to revolutionary changes.  Therefore, I won’t endorse the Fair Tax, even though I like it better than what Buckley proposed.

His proposal?  A simple flat rate of 15% that applies to all income. No exemptions, no deductions, no brackets.

The flat tax should appeal to Warren Buffett and his ilk, because he and his secretary would pay the same damn rate for a change.  The formula, which I’ve blogged about many times, is stupidly simply: what did you make? Multiply by .15. Send it in. 

True, this would be a tax increase for many people. Sorry. We have a $16 trillion+ national debt to pay down.  When some future president phones into Dave Ramsey to yell “We’re Debt Free!” we can look at reducing the rate.

The biggest social problem this proposal creates is the displacement of thousands of tax workers at H&R Block, Intuit, and the IRS.

I think we can deal with that, though.

NYT Describes Mayhem of “Taxmageddon”, And It Will Scare You Sick

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What the hell’s going on at NYT? First, they do a piece on Andrew Breitbart. Then they warn the world that Taxmageddon will crush the world in 2013, beginning with the USA.

Here’s how Business Insider summarized the David Leohardt article:

Basically, with no changes to current law, taxes will rise for everyone, and after tax, inflation-adjusted income for the average American will drop to 1998 levels.

Read more: http://www.businessinsider.com/nyt-here-comes-taxmageddon-2012-4#ixzz1s9RHtbZC

It’s largest tax increase in the history of Western Civilization, and it will happen if Congress doesn’t stop it. We could be looking at a 5 percent drop in GDP in 2013 alone.

Taxmageddon is the result of decades of borrowing to feed the entitlement monster. Only real entitlement reform will solve it.

The After Party will be at Crowne Plaza Grille at the Crowne Plaza Hotel in Clayton on Thursday, April 19 at 7:00 pm. Join us. Bring a friend.

BTW, David Leonhardt’s strategy for heading off Taxmageddon is electing Mitt Romney president. Imagine that.

Video: Rick Santelli Destroys The Buffett Rule Live on CNBC

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The man who’s 2009 rant inspired the Tea Party movement shreds Obama’s “soak the rich” plan. Shreds I said.


Santelli Crushes Buffett Rule

There is no tax solution to America’s spending problem.  Each additional dollar confiscated from the economy to feed the Washington bureaucracy results in an additional $1.40 in new spending.

Washington IS THE PROBLEM!

Starve the monster. Bleed the monster.  But Don’t Feed the Monster!