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

SilverSurfersgrinners
Jun 18, 2013 - 12:42pm

twist

They are rockin in DC, NY and all across the nation.

Chubby Checker - The Twist
pforth
Jun 18, 2013 - 12:46pm

But can they taper the MBS part of QE?

Turd's math is great, it shows that they cannot stop the portion of QE that buys treasuries.

My only question is, what about the other 50% of QE that buys MBS? We know that there's a lot of crap out there that the Fed needs to buy from the banks to keep them solvent. But to my knowledge there's no way to quantify the rate at which it needs to be purchased. Perhaps there is now room to taper that portion of QE a bit... which then gives them room to expand the treasury purchase part of QE again in 6 months.

Even if they only reduce MBS purchases by 10 billion, It would also have the added bonus of knocking gold to $1150 and silver to $18. If they don't spin it right, it might also take some of the steam of out the stock market, but if it does, they can afford a bit a weakness after the recent runup.

Or am I missing something?

CaribSurfKing
Jun 18, 2013 - 12:47pm

The only way out for the FED is inflation

However, its all about wage inflation

Adding a 0 to the price of everything would work great, it has in the past however, this time wages are the problem

You cannot have a $200k home become a $2million home if the average wage stays at $50k!

For the last 100 years Gold has been a decent inflation hedge, however, the DOW has doubled it!

Nobody will live another 100 years, but lets hope we are still in the Gold beating the DOW cycle!

The last 2 years have made me gain 50 pounds, alot more grey hairs and alot less sleep!

SRSrocco
Jun 18, 2013 - 12:49pm

SOME VERY INTERESTING DATA...

First, Turd brings up a very good point. If rates rise, it will destroy the whole Low Interest Rate Swap Derivatives Market. According to the U.S. Treasury TIC data the majority of foreign owned Treasuries are as follows:

APRIL 2013

Treasury Bills = $399.2 billion

Treasury Notes & Bonds = $3.66 Trillion

Bills are less than one year and normally are for Bills that are less than 6 months. Treasury Notes are for 2,5, 7 & 10 year while Bonds are 20 & 30 year.

So, it looks like the foreigners own more the long dated Treasuries.

Second... the rumors that the Russians are buying more of their own domestic gold production seems to be true. What is even more interesting is that American Based Newmont sold the majority of its gold to Europe in 2012 followed by Japan, Mexico and Korea. The United States wasn't even listed in the sales figures. This is amazing as more than 1/3 of Newmont's gold production comes from the USA:

Russia Purchased the Majority of Gold Miner’s Production
dumpster
Jun 18, 2013 - 12:50pm

24th

the gold and silver market is like a round robin of chatter , in one ear is whispered taper , then out the other end comes according to letter writers trying to get attention will gold go to 500 silver 10, then in the deep bowels of stupidity the answer comes back... of course not ..But make sure the headline creases other ear.

Then the monkey trader jumps all over it and line up on line we have a t the other end not taper but stupor..

gold falls into stupor ., not mentioning the 8 sigma event that sent metals down with naked shorts and lie lips .

whilst the gold guy runs for cover because his ears are full of wax and diaper clad stupidity.

a nation of sheepy, cow dung and winding trails of doubt

Missiondweller
Jun 18, 2013 - 12:54pm

Why Interest Rates Never Rise Again (But will anyway)

Zerohedge modeled this and I wrote about it but here's the most important part:

And for those more curious about that other critical economic indicator, debt/GDP, the three scenarios result in the following 2022 debt/GDP ratios:

  • 2% interest - 169%;
  • 3% interest - 183.5%; and
  • 5% interest - 217%, or just shy of where Japan is now.

https://macrowealthpreservation.blogspot.com/2013/01/why-interest-rates-...

At even 3% interest rates we are F*cked!

Silver_investor
Jun 18, 2013 - 12:56pm

I agree

But I'm NOT buying any more gold or silver. I have too much money tied up in silver, and the current spot price is MUCH lower than my DCA. Look, if the cartel wants to keep the prices of gold and silver at these levels for the next couple of years, THEY WILL. What's to stop them?

achmachat
Jun 18, 2013 - 12:56pm

bollocks

I am pretty sure I said "Europe".

deadcatbounce67Owtovit
Jun 18, 2013 - 12:57pm

Owtovit

Great question... I'll start a list of European Turds, you and achmachat are already on it. In the coming weeks I'll get in contact with each of you after having consulted with Turd himself. Maybe he can help me find a way to organize ourselves in some fashion, or support us in some way. It would be nice to have a group of guy's and girl's that could meet up at European events that american "turds" just can't take part in. It would be nice to have a little club in Europe that shares the same interests. I think that the idea is a good one. I live in southern Germany, but I do travel extensively. Let's see how many European Turds are interested...

Strawboss
Jun 18, 2013 - 12:58pm

Awesome post Turd. For

Awesome post Turd.

For someone that struggles coming up with new content on a consistent basis - you do a phenomenal job!

Subscribe or login to read all comments.

Contribute

Donate Shop

Get Your Subscriber Benefits

Private iTunes feed for all TF Metals Report podcasts, and access to Vault member forum discussions!

Key Economic Events Week of 12/2

12/2 9:45 ET Markit Manu PMI
12/2 10:00 ET ISM Manu PMI
12/2 10:00 ET Construction Spending
12/4 9:45 ET Markit Services PMI
12/4 10:00 ET ISM Services PMI
12/5 8:30 ET Trade Deficit
12/5 10:00 ET Factory Orders
12/6 8:30 ET BLSBS
12/6 10:00 ET Wholesale Inventories

Key Economic Events Week of 11/25

11/25 8:30 ET Chicago Fed Nat'l Idx
11/25 7:00 pm ET CGP speech
11/26 8:30 ET Advance Trade
11/26 9:00 ET Case-Shiller home prices
11/26 10:00 ET New home sales
11/26 10:00 ET Consumer Confidence
11/27 8:30 ET Q3 GDP 2nd guess
11/27 8:30 ET Durable Goods
11/27 9:45 ET Chicago PMI
11/27 10:00 ET Pers Inc & Cons Spndg
11/27 10:00 ET Core inflation
11/27 2:00 pm ET Beige Book

Key Economic Events Week of 11/18

11/19 8:30 ET Housing Starts & Bldg Perms
11/20 2:00 ET October FOMC minutes
11/21 8:30 ET Philly Fed
11/21 10:00 ET Existing Home Sales
11/22 9:45 ET Markit November Flash PMIs

Key Economic Events Week of 11/11

11/12 Three Fed Goon speeches
11/13 8:30 ET CPI
11/13 11:00 ET CGP on Capitol Hill
11/14 8:30 ET PPI
11/14 Four Fed Goon speeches
11/14 10:00 ET CGP on Capitol Hill
11/15 8:30 ET Retail Sales
11/15 8:30 ET Empire State Manu Index
11/15 9:15 ET Cap Ute and Ind Prod
11/15 10:00 ET Business Inventories

Key Economic Events Week of 11/4

11/4 10:00 ET Factory Orders
11/5 9:45 ET Markit Services PMI
11/5 10:00 ET ISM Services PMI
11/6 8:30 ET Productivity & Labor Costs
11/6 Speeches by Goons Williams, Harker and Evans
11/8 10:00 ET Consumer Sentiment
11/8 10:00 ET Wholesale Inventories

Key Economic Events Week of 10/28

10/30 8:30 ET Q3 GDP first guess
10/30 2:00 ET FOMC fedlines
10/30 2:30 ET CGP presser
10/31 8:30 ET Personal Income & Spending
10/31 8:30 ET Core Inflation
10/31 9:45 ET Chicago PMI
11/1 8:30 ET BLSBS
11/1 9:45 ET Markit Manu PMI
1/1 10:00 ET ISM Manu PMI

Key Economic Events Week of 10/21

10/22 10:00 ET Existing home sales
10/24 8:30 ET Durable Goods
10/24 9:45 ET Markit flash PMIs
10/24 10:00 ET New home sales
10/25 10:00 ET Consumer Sentiment

Key Economic Events Week of 10/14

10/15 8:30 ET Empire State Fed MI
10/16 8:30 ET Retail Sales
10/16 10:00 ET Business Inventories
10/17 8:30 ET Housing Starts and Bldg Perms
10/17 8:30 ET Philly Fed MI
10/17 9:15 ET Cap Ute and Ind Prod
10/18 10:00 ET LEIII
10/18 Speeches from Goons Kaplan, George and Chlamydia

Key Economic Events Week of 10/7

10/8 8:30 ET Producer Price Index
10/9 10:00 ET Job Openings
10/9 10:00 ET Wholesale Inventories
10/9 2:00 ET September FOMC minutes
10/10 8:30 ET Consumer Price Index
10/11 10:00 ET Consumer Sentiment

Key Economic Events Week of 9/30

9/30 9:45 ET Chicago PMI
10/1 9:45 ET Markit Manu PMI
10/1 10:00 ET ISM Manu PMI
10/1 10:00 ET Construction Spending
10/2 China Golden Week Begins
10/2 8:15 ET ADP jobs report
10/3 9:45 ET Markit Service PMI
10/3 10:00 ET ISM Service PMI
10/3 10:00 ET Factory Orders
10/4 8:30 ET BLSBS
10/4 8:30 ET US Trade Deficit

Recent Comments

by procog, 1 min 43 sec ago
by happycamper515, 17 min 30 sec ago
by Montross515, 34 min 31 sec ago
by Angry Chef, 47 min 59 sec ago