The Era Of Independent Central Banks Is Over

Federal debt has expanded by $9.5 trillion - from $5.7 trillion in 2000 to $15.2 trillion at the end of last year and, as Neal Soss of Credit Suisse notes, is still growing over $1 trillion a year (or $5 billion per day). The state of fiscal sustainability, as explained in this compendium of slides, is perilous, but as Soss notes - interest expense did not go up because interest rates fell faster than debt went up. Looking ahead, he notes that political choice theory suggests that taxes can go up, but not a lot (even as the change-maker-in-chief presents his case) and at the same time an unprecedented aging (demographic) shock limits the ability to control expenditures. None of this is news to readers but the financial implication is critical: interest rates must be kept as low as possible to avoid explosive debt dynamics. As Soss concludes therefore, and something we have been clear about for a long time, the era of independent central banks is closing as those institutions revert to their foundational role as fiscal agents of the state.

The Fallacy Of US Fiscal Sustainability In 11 Quick and Easy Charts...

The Evolution of the Federal Budget in the 2000s

US Debt That Matters

US Interest Expense Outlays

Which Interest Rate To Use?

Contribution to Growth in Federal Outlays in the 2000s

US Federal Revenues to GDP (%)

US Federal Outlays to GDP (%)

US Federal Deficit to GDP (%)

Federal Debt Interest Expense

US Youth Dependency Ratio

US Old Age Dependency Ratio

Not a pretty picture for shared sacrifice, budgets, and the expectation of more QE as inevitable.

Source: Credit Suisse