Terminal

251
Tue, Jun 18, 2013 - 11:33am

As we await the FOMC Fedlines tomorrow, time for another math lesson.

So I'm laying in bed last night, flipping through the channels and I stumble across Fox Business News. I usually stop there as I flip by because they regularly cycle the current gold price in the lower right hand corner of the screen. As luck would have it, Neil Cavuto (who is kind of a douchebag) was just beginning a segment with David Stockman, the former Budget Director for President Reagan and author of this great new book.

Anyway, I start watching this and, before long, I find myself talking back to the screen, even raising my voice from time to time. First, Cavuto is infuriating to deal with. His douchebaggery permeates his interview style and keeps Stockman from elaborating on critical points. However, what really drove me crazy was the avoidance of the main point. The United States is at the terminal stage of its debt and deficit financing. The only remaining method of maintaining The Great Ponzi is record low interest rates combined with extremely short maturities. If rates were allowed to return to "normal" and if the U.S. were to prudently spread their debt obligations across the yield curve, the budget line item "interest on the national debt" would simply swamp and overwhelm the entire federal budget.

First, before we continue, here's the clip of Cavuto and Stockman:

Fortunately, for all of you that are math-challenged, this isn't complicated. Here are two charts of the national interest cost that I found at this website: https://www.treasurydirect.gov/govt/reports/ir/ir_expense.htm. First, here's the breakdown month-by-month of interest paid so far in fiscal 2013:

Interest Expense Fiscal Year 2013
May $24,378,480,861.09
April $35,951,751,963.63
March $23,472,400,737.30
February $16,901,310,565.17
January $17,816,590,831.57
December $95,736,594,801.52
November $25,068,968,472.99
October $12,922,741,407.27
Fiscal Year Total $252,248,839,640.54

The interest expense varies from month to month because of the maturity and coupon schedule. The main point to note is the total. Through 8 months, the total interest is about $252B. Now remember, in the previous post, I showed you that the total deficit so far this year, which includes this interest line item, is about $626B. Projecting forward, fiscal 2013 will likely come in at an interest cost of $350B or so and a total deficit of around $1T.

Now take a look at the total interest cost broken down by year since 1988. This, too, was taken off of the treasurydirect website.

Available Historical Data Fiscal Year End
2012 $359,796,008,919.49
2011 $454,393,280,417.03
2010 $413,954,825,362.17
2009 $383,071,060,815.42
2008 $451,154,049,950.63
2007 $429,977,998,108.20
2006 $405,872,109,315.83
2005 $352,350,252,507.90
2004 $321,566,323,971.29
2003 $318,148,529,151.51
2002 $332,536,958,599.42
2001 $359,507,635,242.41
2000 $361,997,734,302.36
1999 $353,511,471,722.87
1998 $363,823,722,920.26
1997 $355,795,834,214.66
1996 $343,955,076,695.15
1995 $332,413,555,030.62
1994 $296,277,764,246.26
1993 $292,502,219,484.25
1992 $292,361,073,070.74
1991 $286,021,921,181.04
1990 $264,852,544,615.90
1989 $240,863,231,535.71
1988 $214,145,028,847.73

And also consider this chart:

And this is where you stop me and say: "Hey wait a second, Turd. How the heck does this work? Back in the early 90's, the total debt was just a quarter of what it is today but the interest costs were almost the same. Even as recently as 2005, the debt was half of what it is today yet the interest cost was the same."

It's quite simple, really. Since the early 90's Clinton Administration, the policy of the Treasury Department has been to shorten the average maturity of the total outstanding debt. Why would you do this? Think of the "yield curve". A "normal" yield curve slopes positively, as bond yields increase over time. So, the shorter the maturity of the bond, the lower the interest rate.

Additionally, since 1994, The Federal Reserve has aggressively maintained a very low interest rate policy. The side effect of this policy has been the rapid inflation of the tech and housing bubbles. However, the main goal of this policy has been to provide financing for the federal debt and deficit at the lowest interest rate possible. And it has worked!

Therefore, by continually shortening maturities and issuing and refinancing debt at lower and lower interest rates, the "interest on the national debt" has been remarkably stable for nearly two decades.

But here's the problem that Cavuto and Stockman failed to cover: The jig is up. Rates can't go any lower and the average maturity of the outstanding debt can't get much shorter. We've reached the terminal stage and now we have a major problem on our hands.

The only reason that rates remain as low as they are is consistent Fed involvement in the bond market, to the tune of $85B/month. Should The Fed remove or "taper" some of that bond buying, interest rates will rise. Why? Less buyers of treasuries means that prices will fall. Falling bond prices mean higher interest rates. It's no more complicated than that.

And what if rates were to rise? Though admittedly an oversimplification, let's look at it this way:

For fiscal 2013, the U.S. will pay interest of $350B on a debt level of about $16T. That's an average interest rate of about 2.2% with an average maturity of around 5 years. Oh my goodness. (https://www.treasury.gov/resource-center/data-chart-center/quarterly-refunding/Documents/TBAC%20Discussion%20Charts%20Feb%202012.pdf)

Hmmmm. Now let's remove The Fed from the picture. That's what everyone seems to be expecting nowadays. Without direct Fed intervention, interest rates will rise. (I would say that they will rise substantially as we already know that foreigners are aggressively selling treasuries as it is. (https://www.zerohedge.com/news/2013-06-14/treasury-sales-foreigners-hit-record-high-april) Can you imagine the rush for the exits if rates are rising and bond prices are rapidly falling?) If rates were allowed to "normalize", what would be the average interest rate on the federal debt once it's all refunded and rolled by 2018? Well, again by simplifying the math we get:

$20T (2018 debt level) X 5% average rate on a 5 year average maturity = $1,000,000,000,000 per year

So, if rates are allowed to rise and normalize, the line item "interest cost of the national debt" will be equivalent to the entire national deficit of fiscal 2013.

With the continued growth of entitlement and defense spending, the entire federal deficit for 2018 would be $2T, at a minimum. And from where do you think all that funding will come from? Continued and increased demand from creditor nations such as China, Japan and India? Not likely. $85B/month in Quantitative Easing would have to be increased to $170B/month. Do you see now why we call it QE∞?

In the end, as the title of this thread states, we have reached the terminal phase of our debt-induced, deficit spending and growth economy. Rates can't go much lower and the Treasury can't shorten maturities much farther. Their only hope is to maintain and sustain, propping up The Great Ponzi and maintaining power for as long as possible. In this environment, any move by The Fed to "taper" QE would be very short-lived and done for appearances only. The only option is ever-increasing QE, to infinity. Your only financial protection against the eventuality of devaluation and collapse is the acquisition and storage of physical precious metal. Buy some more today, while you still can.

TF

About the Author

Founder
turd [at] tfmetalsreport [dot] com ()

  251 Comments

Jun 18, 2013 - 11:40am

Again, please go see Santa

And Santa asked me if I would help him to promote his next three CIGA meetings. Of course I'm happy to oblige. I just wish that I was able to attend one of them but I can't make any of them. However, you should do everything in your power to make it to one. Every previous session has been met with rave reviews and I'm sure that each of these next three will be equally valuable.

The sessions will be in Chicago on July 8, Vancouver on July 10 (maybe that weasel, Christian, will show up?) and Scottsdale on July 12. You can read all about them and sign up here: https://www.jsmineset.com/2013/06/13/chicago-vancouver-and-scottsdale-qa...

Prize Fighter
Jun 18, 2013 - 11:45am

One man's debt is another

One man's debt is another banker's treasure.

achmachat
Jun 18, 2013 - 11:45am

thank you for all you do!

thank you for all you do!

for some reason western Europe isn't high on Santa's priority list... otherwise I'm sure a whole bunch of European Turdites would have a meet-up there!

wildstylechef
Jun 18, 2013 - 11:54am

rrr

rr

treefrog
Jun 18, 2013 - 11:56am

fufth

5th!

beastly hot here!

deadcatbounce67achmachat
Jun 18, 2013 - 11:57am

Great point...

Achmachat, what we need is a support group for european "turds". How many of us do you think there are?

wildstylechef
Jun 18, 2013 - 11:58am

rrr I'd be Turd!

Negative rating actions could emerge

Fitch Ratings

Tue Jun 18, 2013 11:15am EDT

(The following statement was released by the rating agency) CHICAGO, June 18 (Fitch) The recent rise in U.S. Treasury yields and speculation surrounding possible changes in the Fed's bond buying program have highlighted the potential risks faced by U.S. banks in a rising rate environment, according to Fitch Ratings. A sustained increase in interest rates, potentially signaling an end to the prolonged low rate environment that has hampered bank margins, could have a meaningful impact on capital and bank earnings. We remain primarily focused on the adverse impact that rising rates could have on bank capital under the current proposed Basel III framework for U.S. banks. Unrealized gains on securities held on U.S. bank balance sheets have risen to historically high levels, potentially setting the stage for a reversal of gains and an ensuing erosion of capital levels should rate increases hit bond prices hard. This is especially relevant given banks' increased exposure to mortgage bonds in investment portfolios on both an absolute and proportional basis. We recognize that the realized impact to capital will largely be driven by how the Fed may exit the quantitative easing program. If the Fed were to exit its bond buying strategy in a gradual and transparent fashion, the impact on bond prices could be less significant. However, to the extent that this does not occur, we see the potential for further declines in bond prices, with losses potentially larger on a percentage basis than those reported during the credit crisis. The vast majority of Fitch-rated banks have disclosed that they are asset-sensitive, meaning net interest income (NII) rises along with interest rates, as assets reprice faster than liabilities. While we believe that most income simulation models are likely directionally sound, the magnitude of NII changes could be vastly different than modeled outcomes, depending on how depositors and borrowers actually behave as rates rise. This is particularly relevant given the unprecedented length of time during which rates have remained at historically low levels. Even as the Fed raises short-term rates, margins could remain depressed if long-term rates do not follow suit. This would result in a flattened yield curve, potentially leading to an outcome similar to that experienced during 2004-2006. In addition, rising rates may put additional pressure on banks with longer-duration balance sheets to pursue mergers with shorter-duration banks that will be better positioned to maintain earnings in a rising rate scenario. We believe that asset quality could deteriorate as rates rise, causing cap rates to increase, leading to lower commercial real estate values. Moreover, borrowers that were unable to lock in long-term, fixed rate funding will be burdened with greater debt costs, potentially leading to higher default rates. We note that U.S. banks have experienced prolonged periods of low rates before, such as in the early 1990s, when the U.S. economy was exiting recession. The Fed's unexpected 1994 rate hike caused bond values to drop, hurting bank earnings and capital in the process. However, we note that there were no bank failures resulting directly from the steep increases in interest rates seen in 1994. In general, Fitch expects most banks' margins to expand along with rising rates. This view is incorporated in our ratings and outlook for the banking industry. Fitch does not believe the impact of rising rates will create solvency issues at U.S. banks. However, negative rating actions could emerge if we identify an absence of risk management practices commensurate with balance sheet strategies that could result in adverse impacts to capital and earnings as rates rise. For more detail, see the special report titled "U.S. Banks: Interest Rate Risk -- What Happens When Rates Rise," published today at www.fitchratings.com. Contact: Bain Rumohr, CFA Associate Director Financial Institutions +1-312-368-3153 Julie Solar Senior Director Financial Institutions +1-312-368-5472 Bill Warlick Senior Director Fitch Wire +1-312-368-3141 Fitch, Inc. 70 W. Madison Chicago, IL 60602 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian[dot]bertsch[at]fitchratings[dot]com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. Applicable Criteria and Related Research: U.S. Banks: Interest Rate Risks (What Happens When Rates Rise) here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE

buzlightening
Jun 18, 2013 - 12:00pm

zirp & short term debt.

Goin like a windmill now at warp speed. Shorter maturities is always a sign of imploding system. USDinker dollar will be offered up on the paper ponzi fiat alter at some point. Whatever is offered in replacement will be rejected unless it's sound money back with substance. Not our lies from gas bagging porkin pig men who have no limits to greed; feeding at the trough of we the people. https://images.search.yahoo.com/search/images;_ylt=A0oG7mqcvrxRnUcAadNXN...

I've already named my favorites you can too if you're bored waiting for real money eagles to fly

ivars
Jun 18, 2013 - 12:01pm

Well, government can issue

Well, government can issue money. Then rate is 0, and pay off debts, so maturity is 0 as well.

Question, how much purchasing power will this money have relative to current USD, as there has to be some continuity as USD denominated contracts of all types are all over the world.

But, the USG being the main debtor, they could not care less.

There is also way to turn rates negative by ..ramping up worldwide uncertainty and tensions. Not too early, but not too late either. If FED is running out of ammunition, US military, spies etc, is not yet.

didier
Jun 18, 2013 - 12:10pm

indeed

Very, very interesting.

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