Posted on 10/16/2015 6:43:29 AM PDT by SeekAndFind
Its an ill financial wind that blows no one some good. A very nice and very rich old lady once explained to me that, in her view, the golden age of the American economy happened in the first years of the Reagan administration. This puzzled me: The United States had dipped into recession in 1980, and Paul Volcker was standing on the economic brakes to wring the Carter-era inflation out of the economy, jacking the federal-funds target rate up to damned near 20 percent. People were paying 18.5 percent on their mortgages. But, of course, usurious interest rates are pretty awesome if youre an old lady with a bank vault full of T-bills. You get 12 or 14 percent returns with effectively no risk.
Right now, were in the opposite situation, one where savers are suckers. If you bought ten-year Treasuries in October, you got a rate of 1.99 percent which is about 400 basis points less than inflation is expected to average over the next ten years. You arent giving Uncle Stupid an interest-free loan youre paying for the privilege of lending Washington your money. Of course, thats big money compared with the 0.03 percent APY youre getting on your savings account, or, if youre a big-money private-banking client, the 0.08 percent. Put $1,000 into a savings account today and youll have $1,349.80 in a thousand years.
With real interest rates hovering around the point known among theoretical mathematicians as jack squat, its a great time to be a debtor. And Uncle Stupid is the biggest debtor of all, with $18 trillion or so in official debt, and a hell of a lot more if you play by something resembling normal accounting rules. Janet Yellen keeps making squeaky little noises about the Fed moving to raise rates in the direction of non-zero, but with economic growth stagnant and no general inflation to be seen at Walmart, theres not much incentive to raise rates. And if and when the Fed should decide it really needs to raise rates, theres that $18 trillion-and-growing pile of debt waiting to prison-rape American public finances.
Dont say nobody saw this coming. Everybody sees this coming.
#share#Reversion to the mean is a bitch. If we assume that nothing has magically transformed the nature of debt and finance in the past decade or so and that interest rates will, eventually, move back toward normalcy, we might want to run some numbers. For the sake of simplicity and terror-avoidance, lets say that the debt doesnt grow, that it just sits there at $18 trillion. If interest rates on the federal debt should return to their level in 1995 not some weird exotic point in the past but back in the Clinton years then were going to be paying $1.4 trillion a year just in interest on the existing debt; which is to say, interest payments alone will account for 45 percent of all federal taxes that will be collected in 2015.
Does it get worse? Of course it gets worse. If interest rates should return to their 1982 levels theres no reason to think theyre on the verge of doing so, but theres also no reason to think that it is impossible then well be paying $2.6 trillion a year in interest payments alone. Thats 84 percent of the taxes the federal government will collect this year.
At Clinton-era rates, wed be spending on interest alone about 2.5 times what we spend on the military right now. At early Reagan-era rates, wed be spending on interest alone about what we spend now on national defense, Social Security, Medicare, and Medicaid put together the whole welfare-warfare enchilada, basically.
And, strictly speaking, there is no economic reason to believe that historical extremes are the limit on where interest rates can go. Interest rates on government debt are driven by two things: how credible investors think your fiscal story is and what other options they have. As the world grows richer, there will be a lot of low-risk government instruments available to soak up all that money sitting in U.S. government bonds.
My hope is that when this crisis comes and it almost certainly is coming it will prove an instrument of free-market reform. (You can read a lot more about that here.) Washington may and should and really must do some proactive reform, particularly to entitlements, in the here-and-now, but its a safe bet that the big hairy stuff like privatizing retirement and health care entirely isnt going to happen until Washington is left with no other options. The sort of reforms that are likely to happen in the next ten years or so will not prevent a crisis, but, if done right, they will give us some say over what sort of crisis we have: a slow, low, manageable one or a short, sharp, ruinous one.
Some of my conservative friends believe that were going to be rescued by the Growth Fairy. I believe in the Bankruptcy Fairy.
Kevin D. Williamson is National Reviews roving correspondent.
“interest payments alone will account for 45 percent of all federal taxes that will be collected in 2015.”
And that’s overlooking the fact that we’re already spending 150-200% of that revenue.
Obama’s spending spree was to continue the American death spiral. I’m sure Soros has a few hundred million bet against us.
Illinois can’t pay there lottery winners. Today it’s announced they can’t pay state retirees. They may be the first state to declare bankruptcy.
But those riding in the wagon outnumber those pulling it. If it was 47% when Romney was running, it’s worse now. Young people are deluded into thinking Bernie Sanders has good ideas. For liberals, the only cure for the disasters they cause is more liberalism.
The U.S. is headed the way of the Soviet Union. A breakup without a shot being fired due to unsustainable economic policies.
Interesting article. But it proceeds from the charming and incorrect notion that a government must somehow repay it’s debts. Not so. There is a second alternative: monetizing the dedbt. I.e. simply printing more money. In the short run doing that is much more politically palatable. In the long run its actually more destructive than “bankruptcy”, i.e. repudiation of the debt.
It looks to me that we are already monetizing the debt....just a little bit at the time so the public does not realize what is happening.
The frog in the warm pot theory.
This year, the government has brought in $3.2 trillion in taxes. If properly managed, this amount could be doubled with economic growth alone, not higher taxes. But other policies would be needed as well.
1) The ending of several major trade treaties, to force production to return to the US. This is not to harm trading partners, but to require multinational corporations to produce here, be taxed here, and hire American workers if they want access to US markets. No more H1-B visa employees, and closed borders to new immigration.
2) Any corporation “too big to fail” must be subdivided into corporations that *are* able to fail because of market forces, without disrupting our economy as a whole. Investment “gambling” in such unregulated markets as derivatives, while still legal, will entirely be the responsibility of those corporations engaged in it. And the assets they use for such gambling must be entirely international, with no connection to their US assets.
3) 48% of the US federal budget is spent on Social Security and healthcare. This must stop. The end of Social Security will begin by keeping the promise to those receiving its benefits, but prohibiting new entries into the system. Since it is coupled with Medicare via FICA, Medicare coverage will end the same way, by not admitting new enrollees, while continuing to pay benefits.
This has long been a taxation scam by the government, who used the FICA taxes for other things, effectively doubling the income tax. So it will slash government revenues by about half, which means massive reductions in the size of the federal government.
Since new enrollees will no longer be paying FICA taxes, that money will be put in private individual retirement and health care accounts.
4) The only window for this to take place is likely after a massive economic collapse, when the government has a carte blanche to “fix things”, and that government is not a leftist government. It will need to be accompanied by a strong push for a balanced budget amendment to the constitution, which may actually be the easiest part to enact.
The value of our currency will plummet and we will be crossing the Rio Grande in droves trying to get work in Mexico and Trump's prediction about Mexico building the wall for us will come true.
What Kevin D. Williamson doesn't tell us is where do we go to 'declare bankrupcy' and who do we 'default' on? The Chinese have loaned us money... do we refuse to pay them back because 'we've been to some secret bankruptcy court? It's insane.
Or do we default on the money we've held by the American people? Tell them 'the Treasuries they've bought and earn interest on are now worthless?' Gimme a break.
The next time the United States needs money WHO WILL LOAN TO US? NO ONE.
If we default we lose reserve currency status.. we'll be the same as Haiti - won't be able to 'inflate' our money because no one will be holding our dollars but us. Haiti can't 'print more money' to ease their debt because they're financial losers. That's what Kevin D. Williamson wants to turn us into... Some black loser country... this is almost too stupid to comment on.
The public voted for the government to max out the credit cards. No one defrauded them.
Defeatist!
You say that as if not defaulting is an option.
If you can’t make the interest payments, or seriously inflate the currency to cheat at doing so, you default.
Not true. Countries go bankrupt and soon people are lining up to loan/invest money in them. We are going to lose our reserve currency status at some point and that will not turn us into Haiti...no other country has reserve currency status and many are very wealthy. I would argue it would be a good thing to lose that status as it would compel us, and the government, to live within our means. Lots of short term pain, but in the long run we’ll be better off.
We don’t even agree on our facts...
Countries go bankrupt
What facts? That we owe more money that can ever be paid back? Some sort of bankruptcy/reset is the only option unless you prefer hyper inflation. There is no third option at this point. The dollar as a reserve currency will end at some point.
Countries don’t go bankrupt, they default on their debt obligations, there is no legal forgiveness as in BK.
This would have already happened to the US had the US not been the dominant international currency and not been able to keep it’s interest rates at near zero.
If interest rates go back up to normal or above normal for any reason at all, the US will be forced to either sell assets, all of them, or default.
IMO.....
BTW, our advantage is and has been under threat for some time now and that threat largely comes from Russia, China and their allied state actors. Should be enter a default spiral, printing money will no longer be a Fed tool to prevent financial failure.
Countries dont go bankrupt, they default on their debt obligations, there is no legal forgiveness as in BK.
With the USSR every satellite country claimed the assets within their borders and disclaimed all of the liabilities of USSR except for one.................. (think about it)
Interestingly, Russia took on the international assets and liabilities. I will let you do your own research on the whys and how it played out.....................
I will add that the essence of the formal procedure laws is identifying who will stand first in line for the marbles. If these are not followed then a different procedure is followed.
Remember the GM “bankruptcy”, Obama rearranged the line.
My hope is that when this crisis comes and it almost certainly is coming it will prove an instrument of free-market reform.
1) It was like the frontier days there. All the old rules and structures were gone and they could be creative in finding solutions to problems, Entrepreneurship was alive and well even after being suppressed for 80 years.
2) They were rediscovering their heritage, in their case is was Ghingas Kahn and Buddism. In our case I hope it would be God and the Constitution.
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