Guest Post: Taking Away The Punchbowl

Tyler Durden's picture

Submitted by Charles Hugh Smith from Of Two Minds

Taking Away the Punchbowl

Federal spending has risen by 40% since 2008 and the deficit has soared to over 40% of Federal spending. That's the punchbowl Wall Street fears might be taken away.

Whenever I unleash a tirade at home about how Federal spending has leaped 40% in three years and how the government is now borrowing 42% of its spending, my wife points out that nobody cares because the deficit doesn't impact them at all. This always stops the tirade in its tracks, because it's so obviously true.

As long as the Federal checks keep being issued and everyone gets their 17 "low-cost" meds paid by Medicare, the National Defense State gets unlimited billions to spy on the citizenry and indeed, the entire world, gasoline at $1,000 a gallon flows freely in Afghanistan and other distant corners of the Empire, and Wall Street writes itself billions in bonuses, then nobody cares about the deficit.

The only way anyone will feel the deficit is if their share of the Federal swag is trimmed to pay the interest on the ballooning debt. But the Federal Reserve has a solution to that eventuality: keep interest rates (and thus yields on new Federal debt) super-low.

At zero interest, $50 trillion in debt costs nothing. Heck, you and I could handle the interest payments on $50 trillion at zero interest. At 1%, the interest is "only" $500 billion a year--no big deal, as we can easily borrow another $500 billion a year, no problem. After all, the bond market hasn't barfed yet and we're already borrowing $1.65 trillion a year, plus hundreds of billions "off-balance sheet" in "supplemental appropriations."

(Of course the bond market has been "helped" by the Fed buying $600 billion new Federal debt over the past nine months, but there's no limit on that "help" either: there is literally no limit on the Fed's balance sheet, because $50 trillion in Federal debt is an "asset" that pays a yield. A nice, solid balance sheet, loaded with assets.)

As long as short-term interest rates remain near zero, the deficit spending game can run a long, long time. Here is the current yield on Treasury debt, courtesy of the U.S. Treasury: Daily Treasury Yield Curve Rates. The yield on one-year Treasuries is .18%. Given that "official" inflation (Consumer Price Index) is 3.2%, and unofficial (a.k.a. real-world) inflation is running much hotter, the investor/mark is losing 3% a year by investing in T-bills at .18% yield--or perhaps in real-world terms, 5% or more.

It's like a subprime "teaser rate" mortgage that never adjusts. Imagine having a $100,000 mortgage at .18% interest. The interest would only be $180 a year. On $1 trillion, it's only $1.8 billion--a trivial sum (at 10%, the interest is $100 billion, at 1%, it's $10 billion.)

As long as the Treasury can borrow money this cheaply, there is no visible limit to how much the Federal machine can borrow.

And Wall Street likes it that way--a lot. If you read between the lines of this story-- Moody's sounds alarm over U.S. debt limit and deficits, then you see what correspondent Kevin M. observed when he sent the link to me:

This underscores your point about the unholy alliance between Washington and Wall Street.

On the surface, one might expect Wall Street to be in opposition to federal borrowing because it crowds out investment in private offerings, like stocks. But clearly Wall Street has abandoned it's traditional view of business and the economy, and is now pinning it's hopes entirely on government liquidity.

This is truly scary. The force of interests pulling in opposing directions has always served to bring balance to the economy. That no longer exists, as if all of the forces are crowding on the same side of a sinking ship.

In effect, the income which should flow to savers and owners of surplus capital in an economy that isn't centrally managed (a.k.a. the People's Republic of America, complete with A Natural Security Apparatus, unaccountable Central Bank, kangaroo-court judicial system (just look at ForeclosureGate) and phony elections where the choice is always between hand-picked stooges of the Ruling Elite) is diverted to Wall Street and the "too big to fail" banks.

The one thing uniting the nation is dependence on the Federal punchbowl. But as I noted yesterday ( Can We Please Stop Pretending the GDP Is "Growing"?), there is a unique dynamic to this "recovery"--Federal deficit spending just keeps rising as the economy "recovers."

Many people have noted the parallels with Japan, which has managed decades of profligate Central State largesse by keeping the yield on its government debt near-zero, and relying on its citizenry to take both sides of the trade, that is, to be the owner of the debt and the recipients of government spending via pensions, etc. Put another way, the citizen who buys a bond is also the counterparty.

But Japan had a prodigious savings rate until recently, and securities laws which limited citizens' investment options that effectively channeled much of the nation's savings into government bonds. This dynamic has enabled Japan to balloon its sovereign debt to 225% of GDP.

But the U.S. savings rate is low. It is currently around 5%, up from minus 1% in the housing bubble era, but the official measure of "savings" included paying down debt. Ahem, that isn't savings. If I pay off my $5,000 credit card with $5,000 in cash, I do not have $5,000 in surplus capital, i.e. savings which I can tap. I have zero cash.

The reality is the U.S. doesn't generate enough surplus capital to support $2 trillion (remember to add in the supplemental appropriations and other off-balance sheet borrowing) in Federal debt each and every year until Doomsday.

The other reality is that nobody in their right mind wants to buy debt yielding 0.18% when inflation is 3.2% at best. It is not "attractive" because the buyer can only make money if rates drop further, boosting the value of the bond. At near-zero, there isn't much room for bonds to drop further.

Readers often write me to note that there is no interest due on money the Federal government might just print, rather than borrow via selling bonds. This is true. As I have detailed before in Is the Recovery "Self-Sustaining"? Here's a Test (March 22, 2011), the costs of alleviating the suffering caused by the recession (food stamps and extended unemployment) is about $100 billion a year--a modest 2.6% of the Federal budget of $3.8 trillion.

If the Treasury printed $100 billion and distributed it via food stamps and unemployment (or workfare, etc.) then the effects in a $14.5 trillion economy (that's actually shrinking minus Federal spending) would be modest.

But printing $2 trillion a year to prop up the Status Quo might have consequences. As I have noted here before, according to a study by adherents of the Austrian School of economics, hyperinflation has never occurred in economies in which State spending is funded by selling debt rather than printing money: Deflation vs. Inflation (An Austrian Analysis).

The reason is obvious: interest payments and the willingness of investors to buy more government debt act as governors on spending. If investors balk, and rates rise, then the deficit spending punchbowl gets drained or taken away.

There are no governors on printing money (or on the Fed's balance sheet, which in our system is the money-printing machine).

But alleviation of immediate suffering is only the excuse offered for runaway Federal deficit spending; the real reason why Federal spending has leaped from $2.7 trillion in 2008 to $3.8 trillion in 2011 is to prop up the Status Quo profiteering of cartel-crony capitalism and its partner, the Savior State.

As long as the Fed engineers a near-zero interest rate, the punchbowl can be refilled essentially forever. But if the Fed loses control of rates and they rise, then eventually-- say, when the interest costs $1 trillion a year instead of $400 billion--then the interest costs will crowd out other spending. Sacred cows of one type or another--every dollar of Federal spending is "essential," even though we somehow got by a few years ago with $1.1 trillion less--will be sacrificed.

Somehow I doubt Wall Street and the "too big to fail" banks will suffer much. Their partnership with Washington is just too strong. It's a marriage of more than convenience-- it's a marriage of money and power in virtually unlimited quantities.

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rajc's picture

We got a turd in the punch bowl I repeat we got a turd in the punch bowl

serotonindumptruck's picture

'Bout time. Someone's been pissing in that punchbowl for years.

hedgeless_horseman's picture

06-03 11:07: Variable teaser rates unexpectedly lead to Hell

Alcoholic Native American's picture

We need massive Austerity now or our economy is DOOMED!

SheepDog-One's picture

Austerity=about half the country with no means to eat or buy anything at all! 

Alcoholic Native American's picture

lol, yea I know.  Just wanted to see the reaction.

TheTmfreak's picture

The only option (I think) they have is mitigate their risk by PERSONAL austerity. Some who are ACTUALLY much worse off than others, may not even have that option. But then again life sucks and everyone doesn't have an equal hand. Best they can come up with is an innovative solution to getting themselves out.

Beam Me Up Scotty's picture

You mean the half of the country with the $120/month satelite TV bill?  Or the ones with the $240/month cell bill?  Or the ones smoking a pack a day of smokes at $6/pack?  I know people who won't take advantage of employer sponsored health insurance because it costs them a couple hundred a month.  About 33% of the premium.  BUT, they have top of the line Dish Network at home.

How about the seniors--If your state has tribal gambling, take a look at who is pouring off the busses into those casinos.  Check out the wheel chairs and walkers.  Is gambling a right now too?

Most people can't figure out what wants and needs are.  Thats the problem.

A Nanny Moose's picture

Check out the wheel chairs and walkers.


You mean Scooter Store scooters...Social Security pays, or it's free!

dark pools of soros's picture

that's because we don't have enough people like this lady.. she has the same bank account BEFORE the FED existed...  but screwed up putting in the gold as cash not realizing what was going to happen to money...


treemagnet's picture

We must be getting close - this article sounds like the "despair/hopelessness" stage.

FEDbuster's picture

None of the players (banksters, the FED, government, Wall St.) will stop playing the game on their own, it's too profitable.  Outside forces (China, OPEC, Russia, etc..) will have to "just say no to the dollar", in other words "cut up our credit card".  No reserve currency status, game over.  Then we get WW3 or Mad Max at home. 

As bad as the current situation is, most people are still eating and driving around in their cars.  If gas and milk go to $10/gallon (income stays flat or goes down), then the domestic tranquillity will be threatened.  So the government's "kick the can" strategy will continue as long as they can use the military to back the dollar's reserve currency status.

flattrader's picture

>>>this article sounds like the "despair/hopelessness" stage.<<<

Thankfully he got beyond the "we're ALL to blame" stage which is typical of desparate, ineffectual self-righteous assholes when they can't put their hands of the actual perps...just blame the victims

anarkst's picture

It's the religion of, "something for nothing," taken to its extreme.

DeltaDawn's picture

I will feel less anxious after the collapse, when people will be responding in a more rational way like we Hennypennys are now. I don't care how hysterical they are, I will still get in a few told yous.

TorchFire's picture

Spike that bowl of toxic swill they are ladeling out to the revelers with a bottle of reality.  It seems that only those not attending the big party are able to see the facts. 


CrashisOptimistic's picture

This is what the post Peak world looks like in the early stages.

It won't be getting better.


DoChenRollingBearing's picture

As ZH-er Gordon_Gekko said months ago (you know, when gold was between $1000 and $1200):


Physical gold only.

alien-IQ's picture

Want to wake up Americans? Reinstate the draft.

When their very own sons and daughters face the very real possibility of being shipped of to who knows where to do who knows what and perhaps coming home in a pine box for no good reason...then, and only then, will John and Jane Doe finally muster up the courage to ask that long overdue question: What the fuck is going on here and WHY?

Until then...forget it. It's all somebody else's problem and it doesn't affect them...or so they've been told to believe.

optimator's picture

My service time benefitted me in more ways than there is space for here.  Bring back the draft, but no exemptions.  They don't care what John and Jane Doe think or do, but if it's Hymie and Bonny Goldstein they WILL care enough.

DoChenRollingBearing's picture

"Bring back the draft, but no exemptions."

The uber-wealthy will find a way to keep THEIR precious children out of the Armed Forces.  Trust me on that one.

FEDbuster's picture

Or they will pilot drones from the suburbs of Las Vegas (or maybe the Hamptons?).

Anaxagoras's picture

Unfortunately with unemployment/underemployment at 16% - at least, which doesn't include my favorite BLS plug number "persons who currently want a job," a record 6.8 million - more and more young people will continue to turn to the "all volunteer" military as an employer of only resort. No doubt the military is delighted with high unemployment, as the quality of recruits improves, and the likelihood of ever needing a draft seems remote.

NotApplicable's picture

Yes, this too.

Which means that John and Jane Doe already watch their kids come home in a cardboard box, but instead of outrage, in many it merely reinforces the statist mindset, as otherwise the reality is too painful to bear.

NotApplicable's picture

Charley Rangel has been peddling this line of BS for years. While the premise is true, the implementation (or reinstatement) of a draft is a trap meant to advance the totalitarian state. That he and you would use enslavement as a political tool is completely unethical.

I'm sure the rulers of world appreciate your service to their cause.

alien-IQ's picture

You REALLY need to stop listening to Alex Jones.

NotApplicable's picture

Well, I didn't spend six years in the USMC so that some politician (aided by the mandate created by some of their voting minions) could order my children off to their death.

BTW, that's a really poor try at character assassination. Next time you might want to at least tangentially reference my subject, so it doesn't look so obvious.

alien-IQ's picture

You spent 6 years in the Marines serving corporations not "your country".

You jarheads will buy any line of bullshit as long as it's draped with the amerikan flag.

newworldorder's picture

That's a low blow brother.

While many can partially agree with your statement after a few experiences in the "school of hard knocks," patriotism was and for many still is the predominant reason people volunteer for military service.

It is a sad day indeed when love of country and service to the same is being now rightly called service to the empire.


TheTmfreak's picture

You bring up the problem with over-generalization.

I ALSO have spent 6 years in the USMC.  Everyone who joins and "serves" does so for different reasons. No questions asked some of the best people I've ever met joined. MANY and I do mean MANY are social parasites that skate by and get a paycheck and do minimal, shitty work.  My roommates "baby mama" is the definition of that enough. I call her a wellfare queen. Guess what, she is USMC too.

Back to the point, alot of them, love their country (not government, NEVER lump the two together) and are actually extremely good people. They take individual responsibility very seriously. These people (while in the same organization) should not be lumped with the same disregard with "serving the empire."

Libertarian777's picture

TRUE patriotism is speaking out and doing what's best for the country even when the entire nation is against you. Ron Paul comes to mind. He's been sidelined for decades, even though he is only looking out for the people.

Going with the status quo is NOT patriotism. Just because the people glorify the military as 'service' doesn't mean its true.


Want to serve your country? go work in a homeless shelter, help educate children (and adults). That's patriotism. No glory, no 'honour' attached.

FEDbuster's picture

The US military backed dollar (Federal Reserve Note) has enabled us to force other producing countries to hand over their goods and services for a handfull of worthless IOUs.  All those who have served have allowed the rest of us to benefit from the something for nothing economic model for the past forty years.

NidStyles's picture

Having another person judge you is like letting another person decide you fate. It's a violation of the NAP, and should be treated as such.


So much for you being a Libertarian. You sound more like a socialist than a Libertarian.

TheTmfreak's picture

Instead of furthering the debate you attempt direct (uncalled for) assassinationsand unproductive discussion. What is your need to automatically cast people as something you don't even know? As it looks to me you have a very single dimensional, flat view on this subject.

I am a "jarhead" and I don't buy any line of bullshit "draped in an American flag." Since this is the case, your argument is false and therefore bullshit.

viahj's picture

he/she is just a sign of the times of hyper-ideologues arguing (anonymously) using simple sound bites, headlines, dipolar lenses and stereotyping their contrarian opponent to the lowest common denominator all the while they like to use "nuance" to describe their side's behavior.

NidStyles's picture

Compared to you socialist leeches that merely want to suck on the same teet that feed's the MIC?

karzai_luver's picture

By this date next year the Iraq and Afg "wars" will be seen for what they were.

A total waste.


You will not need to worry about a draft coming back once the lies and bullcrap hit the fan then.

Iraq is a disaster now and will be shown as foolish b.s. from your dear leaders OF BOTH THE CRIMINAL PARTY ELITES.



TheTmfreak's picture

Let me explain what you are actually stating.

"Let's fix the broken system using the system"

Do you see the problem with it? All day long we can spout out the "hey we can fix the system only if we do XYZ" solution but it will never be done because the system cannot be fixed BY the very same broken system.

SheepDog-One's picture

Its been planned all along, next up is the 'depopulation' stage done thru 'austerity' which means 40-50% of americans can no longer get any food or drugs for their ailments...and theyll also 'annuitize' 401K's and pensions. A pittance 'allowance' by the FED to barely live on IF youre complying with the NWO program and being a good little compliant debt slave. Its coming NEXT!

The Treasury Is Soliciting Your Feedback Regarding The Proposed Annuitization Of 401(k) | zero hedge

DoChenRollingBearing's picture

+ $1530

Cash in anything that the government can seize.  I did in late 2008, paid my penalties and taxes, but now it is all mine.

Much of that money has gone into gold.

I did use some to buy bearings though.

Mercury's picture

Take away the Kool-Aid too. 


Whenever I unleash a tirade at home about how Federal spending has leaped 40% in three years and how the government is now borrowing 42% of its spending, my wife points out that nobody cares because the deficit doesn't impact them at all.

Maybe if you explain to your wife that the government in this regard is like a sugar-daddy - and when he stops feeding you candy one fine day you'll suddenly find yourself on the sidewalk with empty pockets and saggy tits.  That might drive the point home.

Cthonic's picture

Off topic, but they all aspire to (or secretly pray to heathen godz that) they'll look like Jane Fonda when they're 70, too.  How many men are newly discovering that their retirement accounts are being covertly eyed as future plastic surgeries slush funds by significant others not aging well.

JR's picture

So where are the breadlines?

John Williams at ShadowStats puts the U-6 unemployment rate that includes “marginally attached workers” close to 23%.

Says Nate at Nathan’s Economic Edge today: “Those numbers are calculated closer to the way they were during the Great Depression, and today’s numbers rival those from that time. Of course, they didn’t have 43 million Americans on food stamps, they had breadlines.”

SheepDog-One's picture

Hi-tech breadlines today in the form of credit-card SNAP cards so the lady with 4 shopping carts full doesnt feel any 'shame' at checkout...but thats about to end.

alien-IQ's picture

the real function of those programs is to hide the suffering and make the spin the "news" engages in more "plausible".

It's one gigantic pile of bullshit being served up as caviar.

JR's picture

Hi-tech breadlines! You've coined an original!!!

kito's picture

youre delusional if you think its about to end. the sheeple will always get to graze.

serotonindumptruck's picture

Those "sheeple" will become wolves, and begin to kill and steal for their right to graze.

bbq on whitehouse lawn's picture

Snap cards are so people don't realize their numbers.

Imagine the empowerment of over half of the store filled with old coupon books, or bracelets or yellow shirts.

Might even give people a reason to ask questions or position for power.

Best to make them act and feel invisible.