Beware Of The Coming Economic Debt Bomb

Authored by Peter Tanous, originally posted at The Street.com,

"There is a sword of Damocles hanging over the head of every American. Sadly, it is about to drop."

Sorry for the drama, but I need to get your attention.

We know that the Fed has kept interest rates low for many years until recently. Why did it do so? Here are some of the reasons we have been told:

  • The Fed wanted to stimulate the economy.

  • The Fed wanted to make it easier for Americans to borrow.

  • The Fed wanted to create a "wealth effect" to encourage spending.

Which of these statements do you think explains the primary reason for the Fed's decision to keep interest rates low? Don't bother. It is none of the above.

The primary reason the Fed kept interest rates low was to avert an economic catastrophe. Today, that catastrophe can no longer be avoided.

The trigger for the economic explosion is the rising interest payments on the federal debt.

Let's go through the numbers.

During the eight years of the Obama administration, our total national debt rose from $12.3 trillion to $20 trillion while interest rates sank to a new all-time low. (The national debt figure includes money owed by the government to itself. The debt held by the public is what interests us since the government must pay out the interest to those bond holders.)

In 2009, the year President Obama took office, the national debt held by the public was $7.27 trillion. At the end of fiscal 2016, that had soared to approximately $14 trillion. Given that our marketable debt doubled from 2009 to 2016, it's remarkable that the annual cost of the interest on the debt rose far less, from $185 billion to $223 billion.

The long march of rising rates that began recently is a dramatic reversal after nearly 40-years of declining interest rates. The new trend portends a return to more historic rates. You may be asking: what are the historic rates? We calculate that the average rate paid on the federal debt over the last 30 years was close to 5%.

The non-partisan Congressional Budget Office (CBO) has just raised its estimate that debt held by the public will rise to $17.8 trillion in 2020. Some economists believe that the figure will be much higher. For our exercise though, let's stick with the CBO estimate. We are postulating that the interest rate on our national debt may return to the long-term, 30-year average of 5%. Note, too, that Treasury debt rolls over every 3 to 4 years so the maturing bonds at low interest rates will be refinanced at the then current higher rates.

Let's do the math together.

Take the CBO estimate of debt held by the public of $17.8 trillion in 2020, a 5% average interest on that amount comes to annual debt service of $891 billion, an unfathomable amount. (In 2017, interest on the debt held by the public was $458.5 billion, itself a scary number.) In its current report, the CBO added: "It also reflects significant growth in interest costs, which are projected to grow more quickly than any other major component of the budget."

Here's the danger:

  • According to CBO, individual income taxes produced $1.6 trillion in revenue in fiscal year 2017.

  • Under this 2020 scenario, over half of all personal income taxes will be required just to service the national debt.

  • Annual debt service in 2020 will exceed our newly increased defense budget of $700 billion in FY 2018.

  • Annual debt service would exceed our Social Security obligations.

Note: We are using fiscal year 2017 budget numbers for comparison. It is likely that all the numbers will be higher in 2020, but the proportions will likely be similar or worse.

These numbers are staggering, more so because the assumptions we use are reasonable and predictable. This dangerous trend is the consequence of our failure to pay enough attention to the national debt, and especially to the effect of rising interest rates.

What can we do about this coming crisis? As investors, we should prepare for higher inflation and higher interest rates. Investors should consider these moves:

  1. Sell all medium and long-term bonds.

  2. Consider diversifying into reasonable amounts of gold and selected commodities.

  3. Buy TIPS (Inflation protected treasury bonds).

This last suggestion is an exceptionally interesting investment because these are U.S. Treasury bonds that adjust for inflation by adding to the principal every six months. So long as you buy the bonds at par, you will get all your principal back at maturity, even in the unlikely event we have a long bout of deflation. On the upside, if there is a spike in inflation, these bonds could increase substantially in value, a welcome and unusual occurrence for a bond guaranteed by the U.S. Treasury.

In time, the responsibility for solving the crisis will fall on the Administration and Congress, who have successfully ignored this predictable problem for years.

Comments

ejmoosa Fri, 05/11/2018 - 08:08 Permalink

Servicing debt does not lower or eliminate debt.

Do that math and you will see it is hopeless.

 

If you do 3 and buy TIPS bonds you get what you deserve.

You already know that they are under reporting inflation today.

brushhog bshirley1968 Fri, 05/11/2018 - 08:53 Permalink

Article ignores the fact that interest rates are controlled by the fed. Rates are rising ever so slightly because they are raising them. We will never see rates at 5% again so the whole premise is wrong. Rates will go to 3 maybe 3.5 and that will pop the bubble they created so they'll cut rates again down to 0.

My advice is exactly the opposite of the author...HOLD your bonds because when they start cutting rates those values are going to rise.

In reply to by bshirley1968

FreeMoney J S Bach Fri, 05/11/2018 - 10:36 Permalink

This can kicking will continue till it doesn't.

As long as "someone" has faith in US debt or US currency, the existing powers will continue to spend, borrow, inflate, rape, pillage, plunder, tax.

When the faith evaporates ( as it has every other time in history that an empire has devalued its currency ) the empire will die.

In reply to by J S Bach

zebra77a WarPony Fri, 05/11/2018 - 13:58 Permalink

"The history of fiat money, to put it kindly, has been one of failure. In fact, EVERY fiat currency since the Romans first began the practice in the first century has ended in devaluation and eventual collapse, of not only the currency, but of the economy that housed the fiat currency as well." 

https://dailyreckoning.com/fiat-currency/

It's of no merit to even concern one's self with attempting to stop or negate a fiat currency, it's only concern is to make sure that one's assets are isolated and protected from the destructive forces of inflation..

 

In reply to by WarPony

aqualech J S Bach Fri, 05/11/2018 - 12:04 Permalink

Imagine this....

The PRIVATE central banks KNOW that we have crossed the rubicon, that the debt cannot be paid back and that the economic bubbles only survive by virtue of constantly adding debt.

They also know that they now have complete control over the politicians and by extension, the judiciary, police, etc.

They know that the TBTF meme has been well established and even codified in banking laws and other legislation

Therefore, starting in the early 2000's, when the unsustainability of the public debt level became obvious, they cast all notions of fiscal responsibility to the wind and embarked on a program to MAXIMIZE public and private debt as much as possible.  

The endgame: when sooner-or-later the debt default comes, all of society will have one giant multi-faceted lien placed upon it, with bail-ins, transfers of assets to, and garnishments on behalf of the holders of the debt (to a large extent CBs now).

Either this is what is going on, or the financial elite are complete idiots to keep letting the debt grow long past the level of sustainability.  Do you question whether our top-level politicians could be corrupt enough to let this scenario transpire?

In reply to by J S Bach

hvl626 J S Bach Sun, 05/13/2018 - 18:23 Permalink

Over 30% of the National Debt is held by government accounts such as Social Security. Current income from SS is used to pay current government expenses and what is left is used to buy Treasury securities. [Does that make your future SS benefits feel secure?]    China, Japan, other nations,  insurance companies, pension funds, state accounts, etc. hold much of the debt.

 

Any feeling of insecurity in the auctioned security [such as run-away inflation] will cause the price to drop--which will increase the interest rate on the purchase. 

In reply to by J S Bach

nucculturalmarxists Stuck on Zero Fri, 05/11/2018 - 11:04 Permalink

Stuck on Zero, I agree. And remember the middle class got 0.00 % of that wealth- because the ultra rich conspired with the fed the wall street banks, Treasury etc. to borrow at 0% leverage 10x and make billions with the understanding the Fed would let them know , in advance, when rates would be allowed to rise and the money printing press turned off

That is why the  solution is to "borrow" a percentage of the net worth (not income)  of the top 1% on a graduated basis with the highest percentage paid by the to 0.01%. This should be done yearly. Set up the "borrowing" to disallow deductions to charity, trusts, non profits, wealth transfers. Say a top rate of 50% for the top of the Forbes billionaire list: that alone would transfer 100s of billions back to the American people. All of the money must be earmarked to pay for Social Security, Medicare, and, if possible, legitimate government debt: with a haircut if necessary. NONE for outrageously generous state and federal government pensions or salary raises.

  We will find that the top 1% with their cronies in the Fed, Treasury, Wall Street Banks, and Congress help us to come up with a fix. When the USA financial ship is righted, we the middle class will allow the officials we elected to repay this new class of debt to the upper 1%.

In reply to by Stuck on Zero

FreeMoney nucculturalmarxists Fri, 05/11/2018 - 18:10 Permalink

We need to stop enabling the spending and promises machine before we try to zero the debt.

Eliminate all charity by government.  Foreign aid, welfare, medicaid, subsidies, transfer payments, the UN, Housing and Urban Development, military protection of foreign countries, IMF, World Bank, Post Office.

Eliminate all domestic social programs.  Social security, medicare, unemployment insurances, department of education, FHA, VA ( they will get better care in private hospitals ) Loan guarantees for students, home owners, bond holders...ect.  If the states really want it, let them take care of it.  Those that wish for a nanny state can have one, those that dont can avoid it.

Freeze the money supply at current level.  Restore convertibility of fiat to precious metals

Return the FED to simple mandate of lender of last resort.

Cut all other federal agencies and budgets to approx 1/100 to 1/1,000 of current size.  Allow President line item veto of any spending.  2/3's congressional override.  Require balanced budget, or automatic across the board budget cuts at mid year to balance budget. 

Abolish income tax 

Sunset all rules and regulations after 5 years unless individually voted by congress.

I could go on but hopefully you get the picture here.  Government doesn't need more revenue, we need less government.

 

In reply to by nucculturalmarxists

brushhog Flubber Sat, 05/12/2018 - 08:05 Permalink

Yes but the fed also bids at all treasury bond auctions and they can bid the price up or down. They direct their member banks and institutions to do the same.The CB is the "buyer of last resort" which is an indirect way of admitting the market is rigged. We also know they collude with overseas governments and CBs to buy at certain levels.

In reply to by Flubber

hvl626 brushhog Sun, 05/13/2018 - 17:54 Permalink

The FRBNY developed software some 15 years ago so bids could be received digitally on line.  Bids that are sufficiently high enough are accepted.  The Bank/BOG retain all securities not sold.  The higher the bids, the lower the interest that is received on the purchase.  All successful bidders pay the same price. The GAO reviewed the software and made numerous recommendations for better controls.  The GAO appeared to have trouble getting the information they wanted.

The FRBNY has EXCLUSIVE control of disbursements of the auction accounts and any related operations they wish to claim.  Ref. 31 CFR 375.3.  The accounts handle apx $10 trillion annually and have NEVER been audited.   All audits of the Fed are done in accordance with guidelines established by the BOG. They are client accounts---not operational accounts.  Questions about the distribution of [new cash] money have been raised.   Ref.  https://ppjg.me/2017/11/09/fiscal-bliss-ignorance-is-bliss/

 

In reply to by brushhog

HopefulCynical HRClinton Fri, 05/11/2018 - 10:35 Permalink

Global feudalism is the ultimate goal.

I've been saying this for 20 years, before I even had any interest in financial matters. I'm glad to see this being said openly in the last few years, from a variety of different sources. The end goal, utilizing communist principles, is to forbid all property rights, thus putting a human construct called 'government' is control of the entire planet. That government is then promptly put under the control of the nationless banksters.

They will never stop. They will have to BE stopped.

In reply to by HRClinton

jin187 Fri, 05/11/2018 - 08:14 Permalink

Warren Buffet is always going on about how he should pay more taxes.  Time to cut that check buddy!

Of course we know it'll be his secretary cutting the check, out of her own account.

lunaticfringe Fri, 05/11/2018 - 08:16 Permalink

"Sorry for the drama, but I need to get your attention."

Why? I can't do shit other than prepare a little.  Only a moron isn't aware of the debt bomb and I've watched the Japanese survive 25 years. Just when exactly am I supposed to piss my pants?

Gallopin Gold lunaticfringe Fri, 05/11/2018 - 08:34 Permalink

The Japs survived because the rest of the world was intact.  They're the kind of people that wait patiently outside their crumbled homes after the earthquake, and line up patiently for help.  They survived because their culture is very subservient to their rulers.  They survived because of carry-trades creating demand for their confetti-like yen.  They survived because despite all of this, they made real things that the rest of the world wanted.  The surviv-ED.  But they about to face not surviving.  The rest of the world is not Japan and will suffer no more than 2 years of deflation before their leaders' heads are on pikes.  After an earthquake, our people start looting and burning.

In reply to by lunaticfringe

bshirley1968 lunaticfringe Fri, 05/11/2018 - 08:38 Permalink

Hey, stupid. Go ahead and use the japos as your measuring stick. That's like comparing...."apples to oranges", you dunce.

I won't go into all the OBVIOUS differences between the feudal island nation that has been a protectorate, economic inflationary sink hole of the US since 1945. I'll let you do some research and thinking......for a change.

Let me just point out that Japan buys the shit out of our debt, uses the dollars to buy resources from the US, and we use our debt to buy the shit out of their technology and manufacturing......the debt sink hole I previously mentioned. The minute our corrupt banking system quits funding them.....they sink like a one egg pudding.

We have been dumping inflation on them for 60+ years but funding them in the process to keep our ponzi going. They are a "favored" nation to the federal reserve. Wake up.

In reply to by lunaticfringe

falak pema bshirley1968 Fri, 05/11/2018 - 09:27 Permalink

The greatest line ever written on this issue was written in 1972 by an economist called Michael Hudson in his book on Super Imperialism as the genesis of the US debt based Empire; post Nixon shock of 1971.

Here it is for those who have not read it :

"Never before has a bankrupt nation dared insist that its bankruptcy become the foundation of world economic policy; that, because of its bankruptcy, all the nations « subordinate » their economies, transferring its bankruptcy to themselves, stultifying their industries, and paying tribute to the beggar." Michael Hudson— US SUPER IMPERIALISM (1972)

This guy has developed an alternative view to economics where debt based monetary systems have dominated world history and politics all throughout time. 

Reagan-Thatcher, post Nixon-Kissinger years, created the 1% oligarchical economy using the asset bubble and cheap Saudi oil to bring down the Carthaginian opposition of USSR, making Bush Snr The Augustus of NWO imperialism.

Now after the implosion of the debt system we socialize further the debt on the public ledger saying like Maggie : There is NO OTHER SOLUtiON; awesome parallel universe logic. What it means is we don't accept the idea of another solution being there as it would destroy our debt built power pyramid!

Now as the 'last action hero-Rambo' of that Oligarchy the Duck uses the same logic to control the vital oil patch and regime change once more Iran having thought he has checkmated into tiny red dwarf the Wahhabist monarchy of MBS.

All the while the debt keeps growing under the carpet!

In reply to by bshirley1968

bshirley1968 DavidFL Fri, 05/11/2018 - 08:45 Permalink

No analysis? The math alone is pretty compelling.

We are already printing money to make interest payments.....have been for a while. You can bet when dipshits like you know about it, the end is near.

Your arrogant assumption is the things will always be as they have been for your very short existence. History is littered with people who woke up one day to a world quite unlike the one in which they went to bed.

What happens when the interest payment is $2 trillion? $3, $4, $5 trillion? You think your world will be untouched? The debt load we carry now has affected the lives of millions of Americans in a negative way. If not you yet, just sit tight, your day is coming.

In reply to by DavidFL