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 [2]. The yield on one-year Treasuries is .18%. Given that "official" inflation (Consumer Price Index [3]) 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.

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