Quote:
Originally Posted by jyl
And here's the crazy thing:
Rates US govt pays to service its debt is doubling and tripling.
6 month T-bill yield has moved from 0.06% in 2015 to 2.46% now
2 year T-bond yield from 0.64% to 2.85%
10 year T-bond yield from 1.40% to 3.16%
Amount of US govt debt is rising $800 billion a year, in 2018.
When the economy slows and next recession starts, US govt debt will start rising $1.5 trillion to $2.0 trillion a year.
That means the US govt's interest payments, which were about $260 billion/year a couple years ago, will be at least $400 billion in 2019 and will march up toward $1 trillion in a decade. For comparison, the defense budget is about $600 billion.
The govt is playing games to hold down interest payments in the short term. It is leaning on shorter maturity debt to get lower rates. So a 6 month US T-bill is yielding 2.46%, more than the 2.30% yield on typical 6-month bank CD. Think about that - the US govt is having to pay more to borrow money for 6 months than the average US bank is having to pay. Problem is, short maturity debt has to be rolled over soon, at higher rates.
When we have the next recession - 2019/20 is my bet - the Federal govt will not be able to use fiscal policy to stimulate the economy; fiscal policy will probably be making the recession worse. The Federal Reserve will have limited room to use monetary policy to stimulate the economy, because interest rates are still low (means not as much room to cut rates), the Fed still owns $ trillion in US debt (means not as much room to do quantitative easing), and the doubling of the US govt's borrowing needs will be pushing interest rates up.
A modest skid can get pretty bad if the driver isn't able to steer into it - or is forced to steer away from it.
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Abut 10 years ago I wrote a piece on the unsustainability of debt service if (not if when) interest rates should spike. In that piece I covered the two major points illuminated by yourself above.
The FED can go to 7T on the balance sheet..after that it is no mans land.
Further....
http://forums.pelicanparts.com/off-topic-politics-religion/734011-adverse-shift.html
An Adverse Shift
Starting with the Financial Crisis in 2008 the United States Treasury embarked on a policy of massive deficit spending resulting in a now 6T USD increase in it's debt level, brining the upfront debt to roughly 16.5T USD. The Federal Reserve on the monetary front lowered interest rates and instituted a number of Quantitative Easings to increase the liquidity of the financial system in order to at first stabilize the system and then to promote economic growth in that system. The increase of liquidity to the system through Federal Reserve purchases of US debt instruments is roughly 3T USD. In September of 2012 the Federal Reserve embarked on OE3 whose tenents included the purchase of 85B a month in US debt instruments and mortgage backed securities with an open ended time frame of the US economy having a 6.5% unemployment rate.
What the concern in this is are the dislocations that these policies have caused in the stability of the global economy and the attendant political, social and cultural strata. Here one can postulate that as US debt levels climb, it destabilizes the above mentioned strata. This is because of several factors which include that the United States is the largest economy in a globally intertwined economy and that the USD is the Reserve Currency of the World. Being the Reserve Currency for the world means that every nation must hold reserves of USD in order to purchase oil. Further the USD being not only the Reserve currency but having a 200 year history of being a stable and thus responsible currency has made it the favored currency to be held by private concerns and individuals. This has been especially true in times of distress either globally or on a foreign national level. This has recently been a factor in the USD strength in the past several years as there has been a flight to the USD and US debt instruments in the face of a potential meltdown of the European Union due to the amount of leverage it has incurred and its slow response to rectifying it's problems.
However with the "unlimited" nature of both the European Central Bank and US Federal Reserves recent QE programs which for all intents and purposes means an unlimited printing of money to purchase sovereign debt, dislocations in the various economies are now beginning to appear which is resulting in their currencies seeking a new equilibrium. This is caused by a defacto devaluation of the large amount of USD being held either by foreign governments, held by private concerns or individuals which then puts pressure on those local economies. Further the real danger lies in the fact that as the USD becomes evermore diluted/devalued/debased those foreign holders of USDs will feel increasing pressure to divest themselves of those USDs or face continued pressure on their economies. Or going beyond this as Y. Aksoy and T Piskovski state in the conclusion of their paper "Foreign Holders of Dollars And The Information Value Of US Monetary Aggregates,"
"That if the leading role of US dollar as an international currency will be challenged by long term
adverse shifts in the preferences of the foreign holders, the US Federal Reserve may face serious
obstacles in the conduct of monetary policy to stabilize the US macroeconomic environment."
Thus in conclusion the Federal Reserves recent "unlimited" QE program has the potential unintended consequence of being a WMD which could create an economic tsunami that would sweep the world with catastrophic consequences.
Unfortunately neither the above piece nor the rest of the following discussion in the link link above is comprehensive in discussing the subject at hand. The President of the Saint Louis FED James Bullard read the above piece one morning on CNBC (along with a second email) and couldn't stop stuttering for 5 minutes as a reaction.