Fed President Sounds Panic Over Level Of US Debt

Nearly a decade after the US unleashed its biggest debt-issuance binge in history, doubling the US debt from $10 trillion to $20 trillion under president Obama, which was only made possible thanks to the Fed's monetization of $4 trillion in deficits (and debt issuance), the Fed is starting to get nervous about the (un)sustainability of the US debt.

The Federal Reserve should continue to raise U.S. interest rates this year in response to faster economic growth fueled by recent tax cuts as well as a stronger global economy, Dallas Federal Reserve Bank President Robert Kaplan said on Wednesday.

"I believe the Federal Reserve should be gradually and patiently raising the federal funds rate during 2018," Kaplan said in an essay updating his views on the economic and policy outlook.

"History suggests that if the Fed waits too long to remove accommodation at this stage in the economic cycle, excesses and imbalances begin to build, and the Fed ultimately has to play catch-up." The Fed is widely expected to raise rates three times this year, starting next month.

Kaplan, who does not vote on Fed policy this year but does participate in its regular rate-setting meetings, did not specify his preferred number of rate hikes for this year. But he warned Wednesday that falling behind the curve on rate hikes could make a recession more likely.

Echoing the recent Goldman analysis, which warned that the recently implemented Republican spending plan could lead to an "unsustainable" debt load, Kaplan - who previously worked for Goldman - also had some cautionary words about the Trump administration's recent tax overhaul, which he said would help lift U.S. economic growth to 2.5% to 2.75% this year, pushing the U.S. unemployment rate, now at 4.1% down to 3.6% by the end of 2018, but not for long.

On the all important issue of inflation, he projected it would firm this year on route to the Fed's 2-percent goal.

The most ironic warning, however, came when Kaplan predicted the US fiscal future beyond 2 years: he said that while the corporate tax cuts and other reforms may boost productivity and lift economic potential, most of the stimulative effects will fade in 2019 and 2020, leaving behind an economy with a higher debt burden than before.

"This projected increase in government debt to GDP comes at a point in the economic cycle when it would be preferable to be moderating the rate of debt growth at the government level," Kaplan said.

He was referring, indirectly, to the following chart from Goldman which we showed previously, and which suggests the US will become a banana republic in just a few years.

A higher debt burden will make it less likely the federal government will be able to deliver fiscal stimulus to offset any future economic downturn, he said, and unwinding it could slow economic growth.

"While addressing this issue involves difficult political considerations and policy choices, the U.S. may need to more actively consider policy actions that would moderate the path of projected U.S. government debt growth," he said.

So to summarize: when US debt doubled in the past decade the Fed had no problems, and in fact enabled it. And now, it's time to panic...

Finally, going back to Kaplan's point that fiscal stimulus may no longer work during the next downturn covered by a record mountain of debt (which according to Trump's budget will hit $30 trillion by 2028), we agree, and is why we suggested a few days ago that the next crisis will lead to - what else - even more QE, which also explains why Goldman has been so desperate to get its clients to sell all the Treasurys they have now, as Goldman's prop desk keeps adding to its inventory...

Comments

Baron von Bud mtl4 Wed, 02/21/2018 - 13:43 Permalink

The Treasury can't reduce debt or the Ponzi will collapse. Rising bond rates is what happens when there's too much debt. Trump's tax plan guarantees a debt surge and rising rates. The Fed is rolling off its $4T in debt further causing rates to rise. So either the Treasury cuts spending and the system collapses or the Fed stops selling bonds and signals quantitative failure which causes a financial panic. Does a middle equilibrium point even exist? Unlikely to get it right by the Fed or the Treasury. Say bye-bye.

In reply to by mtl4

veritas semper… Juggernaut x2 Wed, 02/21/2018 - 14:35 Permalink

Exactly. The Donald was put in place to try to restructure the American corporation,called USA.

But ,it's too late and not humanly possible(hey,I think even God could not do it,it is so FUBAR)

The system itself ,based on EXPANDING the debt,to create "growth"(they call this GDP growth;laughable) is set this way that it makes it impossible to repair now.

If they stop printing and stop QE and stop ZIRP(0.2 is basically 0%),the system collapses immediately.IT NEEDS DEBT to be fed into it to survive.  This is also why ,the debt can not be paid off. EVER.

If they continue the current path,it will collapse through total destruction and rejection of the $.massive inflation and huuuge interests paid on debt(now 310 Bil only on Federal debt).this is supposed to be slower collapse,but the rest of the world is rejecting the petro-f*cking-$.

So,I say there is NO WAY OUT. And,no ,a big war,will not help JUSA this time,like it did with WWII.

It's lights out for JUSA.

It's going to be interesting to see how big of a sh*thole JUSA will be without the petro-$ and I am sorry I will not be able to hear the comments from  those who laughed about Venezuela(a country which received so many color revolution from JUSA that their socialism can not be called Venezuelan anymore): I am willing to bet anything that what expects JUSA is going to make Venezuela a paradise by comparison.

In reply to by Juggernaut x2

JibjeResearch eclectic syncretist Wed, 02/21/2018 - 11:02 Permalink

I disagree.... 

We should pursue a soft landing .... by *slowly giving out small amount of multiple QEs at interval.  This will give time for people to move money where they see fit.  The one that will hurt the most are people with no resources to move around ...

When the USD is completely wasted ... then transition into metal or crypto..., and I believe the people will support cryptos more than metal ...

 

In reply to by eclectic syncretist

JibjeResearch gaoptimize Wed, 02/21/2018 - 11:20 Permalink

For a soft landing ...

The Fed must give slow and small QE at an interval.  This provides the time for people to move assets around.  The market will not crash ... and people will have to accept small gain.  Those that risk big will get big loss.  The people that hurt the most are those who don't have assets to move around, so it doesn't matter for them...  they will lose anyway ...

Next, allow money from foreign countries to come in ... and have them be the bag holders ...

There are ways.... we just need to be creative ..

One easy money making way for the Gov is to allow citizenship for money.  If they invest in the states, that's a big plus because the investment is annual taxes....

Protectionism is a doom strategy ... why protect the lazy people ... anyway ... And, on top of that .. globalization is coming and nobody can stop it.  It's better to be the front man ... and the first investor because that's where the profit is the biggest.

Most Americans need to learn now to look at the positive side of things..  We can't do that with a negative mindset!

 

In reply to by gaoptimize

onewayticket2 Arnold Wed, 02/21/2018 - 11:26 Permalink

But it's not political.....really.

 

When obama DOUBLED the debt in 8 years, the Fed said nothing.   

Coupled with the earlier article about how the Fed will tank the market in late 2018 (just in time for the Election, no doubt), one has to wonder the degree to which the Get Trump desire has infected the Fed.

In reply to by Arnold