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Name The Country: 101.5% Debt/GDP And... 1.7% Effective Interest Expense

Tyler Durden's picture


That this rhetorical question will not pose any difficulty is almost sad: the answer, of course, is America, which as we pointed out yesterday, just crossed 101.5% in total debt/GDP (excluding its tens od trillions in unfunded liabilities, that is a different story entirely). What however may surprise some is that the already curiously low average interest rate that America pays on its interest, which in calendar 2011 was 2.5% (or $240 billion on $9.5 trillion in debt) is in realty far lower. The reason is that, as has been indicated repeatedly over the past years, the Fed is now the proud owner of $1.7 trillion in US debt, and it continues to load up on ever more expensive debt courtesy of Twist. As a result, it pockets the interest expense paid out by the Treasury, which in 2011 amounted to $76.9 billion. Then, once a year Bernanke remits all of his "profits", which are essentially interest proceeds on its portfolio, back to the Treasury, which then lowers the effective cash outflow, to just $163.1 billion, or a tiny 1.7%.

This can be seen on the chart from SocGen below:

Another way to visualize the dramatic impact of the Fed in the Treasury curve is the following chart which shows the average length to maturity as reported, and how little it is if one excludes the Fed's SOMA holdings:

And the paradox is that the more the Fed monetizes, and the more it gobbles up high interest debt, i.e., anything on the long end of the curve and moving left, the more the Treasury is incentivized to have Bernanke buy as much as possible as it insulates it entirely from any interest rate spike. Coupled with the implicit benefits to politicians from monetization, which in turn allows them to spend with reckless abandon and increase the debt deficit knowing full well Bernanke will monetize it come hell or high water (recall that the US will run about $1 trillion annual deficits for the next several years), and one can see why everyone in America in a control position has so much to gain, and nothing to lose by encouraging the Fed to print. The only thing holding it back: the threat that those evil speculators will drive gas prices to the stratosphere. Which may be a consideration before November, but come election day the floodgates will open.

Finally for all those saying the Fed can merely extend Operation Twist after it expires in June, we present the following chart which we showed previously, and which shows that the Fed quite simply will not have enough short-dated (under 5 years) bonds to sell in order to sterilize its long-term purchases. Sadly any new Fed intervention will be of the tried and true LSAP outright monetization when it finally occurs, which means whenever Obama is confident that he can take the risk of soaring gas prices. We wonder how long until the precious metals figure this out.


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Wed, 05/02/2012 - 16:27 | Link to Comment Roland99
Roland99's picture

Just put all your eggs in that Green Mountain basket and you'll ride this storm out and come out smelling like gold-plated roses!



oh wait.....

Wed, 05/02/2012 - 16:52 | Link to Comment Dr. Richard Head
Dr. Richard Head's picture

Sounded like most commentators on CNBC or the Press Conferences from the Bearded one to me.

Wed, 05/02/2012 - 22:08 | Link to Comment Harlequin001
Harlequin001's picture

I hope the Treasury did proper 'KYC' on that...

Wed, 05/02/2012 - 19:33 | Link to Comment BLACK_DOG
BLACK_DOG's picture

thanks, i needed that!

Wed, 05/02/2012 - 16:49 | Link to Comment Death and Gravity
Death and Gravity's picture


Wed, 05/02/2012 - 17:09 | Link to Comment Normalcy Bias
Normalcy Bias's picture

Hey, in Bernankistan I hear it's legal to have sex with your dead goat-wife up to six hours post-mortem, so it ain't all bad!

Wed, 05/02/2012 - 16:28 | Link to Comment Bunga Bunga
Bunga Bunga's picture

La la land?

Wed, 05/02/2012 - 16:41 | Link to Comment Vagabond
Vagabond's picture

As sustainable as a 90 year old boner without viagra.

Wed, 05/02/2012 - 16:28 | Link to Comment Corn1945
Corn1945's picture

How does this reconcile with your prediction of FRNs and higher interest rates?

Wed, 05/02/2012 - 16:33 | Link to Comment Tyler Durden
Tyler Durden's picture

Wed, 05/02/2012 - 16:48 | Link to Comment LawsofPhysics
LawsofPhysics's picture

And China wants to be the next victim of their own success?  Let them have it, bring all the troops home to crush the rioters, default, and let China fucking have it.  With everyone, including China, manipulating their fiat and propaganda at an all time high let's see how long it lasts.  The whole world can't have this train wreck happen fast enough.

Wed, 05/02/2012 - 17:14 | Link to Comment Dr. Engali
Dr. Engali's picture

You my want the U.S. troops aiming their guns at U. S. civilians but that is not a future I look forward to. I'd prefer them to point their guns at the criminals who out us in this mess. Everything else you said I'm okay with.

Wed, 05/02/2012 - 17:43 | Link to Comment AccreditedEYE
AccreditedEYE's picture

While I sympathize with the underlying theme of your post, reality tells us that they will crush ALL fiat at the same time to usher in the new, GLOBAL currency. World markets will require another Bretton Woods moment.

Wed, 05/02/2012 - 16:29 | Link to Comment SheepDog-One
SheepDog-One's picture

Theyre monetizing the debt, plain and simple.

Wed, 05/02/2012 - 17:09 | Link to Comment kraschenbern
kraschenbern's picture

Gono, Gono!

He's my man!

If he can't do it

Bernanke can!

Sorry, couldn't resist it.

Wed, 05/02/2012 - 17:53 | Link to Comment ReactionToClose...
ReactionToClosedMinds's picture

what else can they do realistically .... without looking like the Captain of the Titanic?


And do not think I am 'advocating' their 'action' ..... no. no. no ... the Sorcerer's Apprentice has lost control ...... but will the Sorcerer return in time to right the spinning out of control dynamic?  

Wed, 05/02/2012 - 16:29 | Link to Comment zilverreiger
zilverreiger's picture

Quick, Hire Hugh Hendry to talk it up!

Wed, 05/02/2012 - 16:29 | Link to Comment youngman
youngman's picture

This should not affect the Bond market at all...nope ..not at all....say..where are those vigilantes?????

Wed, 05/02/2012 - 16:46 | Link to Comment SheepDog-One
SheepDog-One's picture

I guess they were all convinced to sit down and shut up with a gun to their heads.

Wed, 05/02/2012 - 16:32 | Link to Comment Don Levit
Don Levit's picture

According to Cullen Roche at, there is no such entity as unfunded government liabilities.

With the printing press, it makes unfunded a misnomer.

Don Levit

Wed, 05/02/2012 - 16:41 | Link to Comment Sophist Economicus
Sophist Economicus's picture

In Cullen Roche's world view, he is absolutely correct.    However, ask Cullen what the puchasing power of those  'liabilities' will be once they are funded.    That is where the theft happens.   Something Cullen doesn't address

Wed, 05/02/2012 - 17:05 | Link to Comment TheFourthStooge-ing
TheFourthStooge-ing's picture


However, ask Cullen what the puchasing power of those  'liabilities' will be once they are funded.    That is where the theft happens.   Something Cullen doesn't address

When that happens, I'm confident that Cullen will find the McDonald's $100 value menu "perplexing" and "unexpected".


Wed, 05/02/2012 - 17:06 | Link to Comment i_fly_me
i_fly_me's picture

Every dollar in existence is an unfunded liability.

Wed, 05/02/2012 - 17:00 | Link to Comment LoneCapitalist
LoneCapitalist's picture

I heard another idiot say the gov. doesnt HAVE to pay out this money. So, I guess its niether "unfunded" nor a "liability."

Wed, 05/02/2012 - 16:37 | Link to Comment Sophist Economicus
Sophist Economicus's picture

This is why those shorting bonds waiting for the vigilantes to come to the rescue are nuts.    This is a deliberate and brilliant SHORT term plan.   They are monetizing the debt and slowly erroding any black mail attempts from foreign entities.    When we start to hear of gold regulatory legislation, that is when we'll know that they think they are loosing control.  

Wed, 05/02/2012 - 16:37 | Link to Comment Cdad
Cdad's picture

Do it, Ben!  Monetize more debt...shit hammer that dollar...break the bond market.  Go ahead.

When it becomes clear to the rest of the world that the US market for debt has been broken by the Fed, the Fed will have committed suicide...and we can then be done with Mr. Bernanke and that criminal outfit known as the Federal Reserve.


Wed, 05/02/2012 - 16:39 | Link to Comment SheepDog-One
SheepDog-One's picture

The Maniacal Monetizers, hard at work.

Wed, 05/02/2012 - 17:33 | Link to Comment MachoMan
MachoMan's picture

When they embarked on this journey, they knew it had a limited duration...  my question is whether the successor master will be kinder.

Wed, 05/02/2012 - 16:40 | Link to Comment Bartanist
Bartanist's picture

So why exactly do we need the Fed? They seem to be in a redundant position. CUT OUT THE MIDDLEMAN.

Wed, 05/02/2012 - 16:44 | Link to Comment SheepDog-One
SheepDog-One's picture

I guess we 'need' the Fed because they have no other way of surviving themselves, other than their fractional reserve lending scam.

Wed, 05/02/2012 - 16:55 | Link to Comment Dr. Richard Head
Dr. Richard Head's picture

One needs 3 shells in order to play the Shell Game.  Too bad the US population is the pea.

Wed, 05/02/2012 - 16:42 | Link to Comment junkyardjack
junkyardjack's picture

We can go to at least 130% if not higher, an economist told me so

Wed, 05/02/2012 - 16:43 | Link to Comment Thisson
Thisson's picture

Remember that the remittances the Fed makes back to the treasury are *after* dividends are paid out of the portfolio's earnings.

The Fed gets to keep a "vig" for its shareholders.

Wed, 05/02/2012 - 21:00 | Link to Comment Amish Hacker
Amish Hacker's picture

Expenses, plus 6% of a number that gets bigger every year, thanks to the Fed.


Wed, 05/02/2012 - 16:44 | Link to Comment tmosley
tmosley's picture

Monetization produces outcomes that are favorable to governments?

Ya don't say?

This is a default, without the default.  Everyone who holds, or gets paid in any form of US paper will lose.

Wed, 05/02/2012 - 16:46 | Link to Comment Cdad
Cdad's picture

Roll out the crusty Bob Doll with his perpetual perma bull cliche'd speak...always the same...a man who could be replaced with a tape recording of his opinion expressed in 1999.

There must be serious smoke in the cockpit at the roll out the Doll.

Wed, 05/02/2012 - 16:49 | Link to Comment SheepDog-One
SheepDog-One's picture

Bob Doll, wow. Hey CNBC bring back some more Dot.Com personality blasts from the past! 

Had to love the REIT guy interviewed earlier, they shut him down hard when he went off script and said the economy is crap.

Wed, 05/02/2012 - 17:42 | Link to Comment TheFourthStooge-ing
TheFourthStooge-ing's picture

Tomorrow's guests: David Lereah and Angelo "Agent Orange" Mozillo.


Wed, 05/02/2012 - 16:52 | Link to Comment you enjoy myself
you enjoy myself's picture

and yet the miners are trading like we'll have $1000 AU and $20 AG.   we don't have the will to cut a single dollar from fed govt spending - but we're to believe there's any path forward that doesn't involve debasing the currency? 

Wed, 05/02/2012 - 16:57 | Link to Comment Dr. Engali
Dr. Engali's picture

Money that would flow into the mining stocks flow into the GLD and their ilk. Less worries about nationalization ..... Until they confiscate it.

Wed, 05/02/2012 - 16:53 | Link to Comment Quinvarius
Quinvarius's picture

This is the charade we play to pretend we are not creating unbacked pure inflationary money.  We sell debt to someone with an endless checkbook who never collects interest on it and will always roll it over.  Bankers and politicians are delusional if they believe the whole world doesn't see this as direct printing press action.

Wed, 05/02/2012 - 16:54 | Link to Comment penexpers
penexpers's picture

Fuck you, Bernanke.

Wed, 05/02/2012 - 16:54 | Link to Comment giggs
giggs's picture

Let me get this straight.  We have an "independent" fed that buys 62% of our government's debt. Then, when it comes time to cash in, this "independent" fed gives the profits back to the government?  How on god's green earth can anyone ever believe that we have an independent fed?? 

Wed, 05/02/2012 - 22:30 | Link to Comment machineh
machineh's picture

Indeed. Let's take this logic a step farther. If the Fed is basically an extension of the U.S. government (after all, the president appoints its chairman), then GAAP accounting consolidates the Fed as a government subsidiary. Debt held by the Fed is treated as subsidiary-parent debt and cancels out, since it is not owed to third parties.


1. Treasury debt held by the Fed disappears (effectively redeemed by the left hand of the Fed, days after being issued by the right hand of the Treasury). Or as Frank Roosevelt might have said, "The government owes it to itself."

2. The effective interest rate paid on publicly-held Treasury debt is the full coupon rate, since Fed-held debt is consolidated.

3. Debt held by the Fed was redeemed with NEWLY CREATED THIN-AIR MONEY.

Treating QE as outright monetization by a government subsidiary gives a clearer picture than conveniently pretending the Fed is an "independent" entity. In no way is this claim an endorsement of MMT, which advocates such monetization. In fact, monetization represents a desperate descent into routine, large-scale fraud by a racketeer-influenced and corrupt quasi-governmental organization.


Wed, 05/02/2012 - 16:54 | Link to Comment Dr. Engali
Dr. Engali's picture

My guess is the next QE will be the last. The world will say Fini, we are tired of the U. S. exporting their inflation to us.

Wed, 05/02/2012 - 17:25 | Link to Comment Matt
Matt's picture

At 1 percent effective interest, they could survive at 2000 percent debt/ GDP. at 0.5 percent, 4000 percent. 

Yes, if America was alone in debasing, everyone would rush out the door like Weimar or Zimbabwe. But no other central bank is allowing USD to debase relative to their currency, so on it goes.

With margin hikes, naked shorts, and GLD to suppress PM prices and with all currencies staying the same value relative to one another, this game could go on for a couple decades, or maybe longer. 

The Achille's Heel is oil prices. They have to come up with a way for some of the new money to go into wages, stimulus credits, subsidies or universal welfare or the whole thing will grind to a halt.

Wed, 05/02/2012 - 18:26 | Link to Comment Al Huxley
Al Huxley's picture

Or they could just keep fucking the average guys, and put out bogus statistics to explain that 'there is no inflation'.  That's an option too.

Wed, 05/02/2012 - 18:12 | Link to Comment alfred b.
alfred b.'s picture


    This one being the last, (and I agree it will) must, should and will be massive, even monstrous....the idiot bernanke has only this last kick at the can, and he's well aware of this!

     Whenever QE2 was on the way, the fed asked the big banks to provide them with feeback and a number, and at that time Goldman Sucks came up with a 4 trillion $ figure; but ben didn't listen...let's see if he's learnt anything since.



Wed, 05/02/2012 - 16:56 | Link to Comment The Swedish Chef
The Swedish Chef's picture

I never connected these bits of information...


I know The Fed is supposed to give all surplus money back to Treasury. I know The Fed has bought bonds hand over fist. However, I never saw what a fraud that set up is. I thought it was bad enough that they lent trillions at coupon rate. When I realized (just now) that the true cost for the Treasury is whatever cost uncle Ben has for maintanence and open market operations, the rest just goes back to the debtor. 


Pure genius.

Wed, 05/02/2012 - 17:14 | Link to Comment Rainman
Rainman's picture

The PDs chip off a piece too, so there's more stealth capitalization of the insolvent banks....brilliance, huh ?

Wed, 05/02/2012 - 20:30 | Link to Comment LongSoupLine
LongSoupLine's picture

And there lies the biggest ponzi and transfer of taxpayer wealth in history. and silver.

Wed, 05/02/2012 - 16:58 | Link to Comment Yen Cross
Yen Cross's picture

 The main reason for that " Crude Spike " , is  the [FUEL] costs associated with keeping all those Helicoptors SPOOLED up on the tarmac!  We all know how this going to end up.

  That 101.5% figure is on the light side. Just like everything else, it's shad-dow inventoried <>

Wed, 05/02/2012 - 17:05 | Link to Comment Jason T
Jason T's picture

A drop in productivity or output per hour from workers.. for  a few years due to lack of investment and a deteriorating physical infrastructure will cause the inflation that will wreck the havoc on our monetary system.

Wed, 05/02/2012 - 17:09 | Link to Comment resaci
resaci's picture

Stop ObamaNation

Stop the Debt

Wed, 05/02/2012 - 17:30 | Link to Comment Sudden Debt
Sudden Debt's picture

Why didn't you say that before!?!?!!

Wed, 05/02/2012 - 21:13 | Link to Comment Lednbrass
Lednbrass's picture

Problem is stopping Obama puts Romney in, who was equally fond of the credit card in Massachusetts.  Given his propensity to rack up massive debt there, I expect he will go completely nuts in the White House.

Wed, 05/02/2012 - 17:18 | Link to Comment Itinerant
Itinerant's picture

101.5% is not the country's debt -- that would be a relief.

In reality that's just the federal government's portion, and it's not 101,5% of whatever; it's over 666% of revenue. accumulated by spending 160% of income.

Oh, and them's not consolidated public sector figures (like European countries): add at least T$5 GSE's, T$2.8 state/local debts, etc.

But cheer up, one day the debt might be selling for a lot less than the face value, and then you could add the diminishing value of the liabilities to the income side of the annual report.

Wed, 05/02/2012 - 18:08 | Link to Comment Yen Cross
Yen Cross's picture

 Central Bank Smackdown ;  Happening Now!!!   BYO-Fiat!

Wed, 05/02/2012 - 18:12 | Link to Comment Al Huxley
Al Huxley's picture

What a clever scheme this is!  I should apply it at home - I'll start a company, that will lend money to me at say 6%, but then it will pay 5% of that interest back to me, so I'll only be paying 1%, and since I'll own the company I actually won't be paying anything - so unlimited credit, super-low interest! what am I missing?  Oh yeah, the ability to print unlimited quantities of money to lend myself. 

Wed, 05/02/2012 - 18:19 | Link to Comment alfred b.
alfred b.'s picture


    Why yes, of course I agree, and I think you should call it 'Federal Home'.    With that name you're sure that all yr neighbours will look the other way and MSM will glorify you for yr ingenuity!




Wed, 05/02/2012 - 18:27 | Link to Comment Al Huxley
Al Huxley's picture

Excellent suggestion, thank you.

Wed, 05/02/2012 - 19:51 | Link to Comment alfred b.
alfred b.'s picture


Well thanks to you: you're the one who came up with the idea in the first place!   Time for a cold one!



Wed, 05/02/2012 - 19:25 | Link to Comment Mr Lennon Hendrix
Mr Lennon Hendrix's picture

We wonder how long until the precious metals figure this out.

Obviously longer than can be rationalized.

Wed, 05/02/2012 - 21:46 | Link to Comment Stuck on Zero
Stuck on Zero's picture

Just had a thought.  If we plunge into a recession and the GDP falls year-to-year then the debt to GDP number will look dramatically worse.  Oh, wait.  I'm wrong the Fed has eliminated all possibility of recessions due to scientific money management. Wheew.

Thu, 05/03/2012 - 06:03 | Link to Comment cnhedge
cnhedge's picture

US Daily: 2012 US April Payroll Preview: Sluggish

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