It’s the Interest Rates, Stupid

In terms of our national debt, liberals run the gamut from thinking it’s a problem in the future but not now, to it’s never a problem ever.  Of course the practical aspects in terms of policy lead to the same thing:  Keep on spending baby!  Even the liberals who feign deep concern over the debt will only provide lip service to the idea of doing something about it.  And really, what choice do they have?  If you’re a liberal, everything that is important to you about your political ideology and wishes for policies have to assume that a country can keep on spending and running deficits forever.  That leads to the eternal problem for liberals: cognitive dissonance. Their entire ideology is based on the false twin assumptions that money is no object and everyone can get more out of the welfare state than they put into it.  Best not to think about it.

A few weeks ago, we passed the 16 trillion mark in national debt.  Congratulations to President Obama for that!  Whether he likes it or not, the debt will be one of his administrations’s enduring legacies.  But even with such massive amounts of debt, we seem to be humming along.  In fact, believe it or not, we are actually paying less to service the debt now, than we were in 2000.

Currently, interest on the debt is 224.8 billion dollars for 2012.  That’s about 6% of the budget on a debt of almost 16 Trillion dollars. Not too bad.  Now in 2000, interest was 12% of the budget; double the percentage of the current budget.  However the amount of interest we were paying that year was 215.2 billion dollars.  Just a little less than what we are paying now, even though the debt at that time was about 5 trillion dollars.  So how is it that we are paying almost the same in interest now when the debt is 3 times as much?

Our interest rates.

10 year Treasury bond yields in January 2000 were 6.66%.  AS of January 2012 they were at 1.97%. Those are interest rates at historic lows.  The chart I was looking at went back to 1953 and interest rates now are at the lowest rate they’ve been since then.  If we were paying the same interest now as we were paying in 2000 our payment on the interest on our debt for this year would be over 700 billion dollars.    That’s a pretty large amount of money to spend every year in which you get nothing out of it.

Although the average Treasury interest rates since 1900 is 4.9%, we’ve had our interest rates run the gamut.  For the period of November 1979, to October 1985, except for one month interest rates stayed above 10%, reaching a high of 15.3%.

Interest rates are the real time bomb of our debt crisis; just ask the Greeks (paying 24% on their bonds).  Under the conservative CBO Baseline interest on the debt exceeds defense costs in 2019.  Of course, the CBO’s predictions on interest rates are no better than mine, that is to say, crappy.  There are too many factors involved that goes in to interest rates.  But I don’t see how we can avoid the inevitability of Treasury bond interest rates returning to the normal 4% to 6 % range.  In fact, interest rates returning to these levels would instantly add 4.9 Trillion to our national debt.

Or higher.  They’ve been higher before, and with the unprecedented amount of monetary expansion we’ve done in the past few years, eventually they’ll have an effect on our inflation rate that even government statistics won’t be able to hide.

So… if you think interest rates are going to continue to stay at these historic lows, spend away.  I can’t predict when interest rates are going to start rising again.  If I could, I would be posting this from my own Private Island.  Or Idaho.  But in any case I would be really rich.   However I am sure that interest rates will rise again at some point.  Meanwhile, the debt gets higher.  We are adding a trillion dollars plus of new debt to our deficit every year.  We have to service that debt.

There are things we could do to mitigate this situation.  We have a great deal of intergovernmental loans that could be rolled over into 50 or 100 year bonds, locking in these historically low interest rates, however The Treasury Secretary doesn’t seem to want to do anything that will make our debt situation look worse, even though in the long run it would stabilize our long term debt situation.  Of course, if you haven’t noticed, this administration isn’t concerned with the long term.

We’ve seen other nations hit the debt wall, and we’ve seen the economic havoc that it can cause, but forward we go, spending away as if there is no tomorrow.  However tomorrow does eventually come, and so will these higher interest rates.

And our comeuppance.

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Heinlein Shrugged

There has been an internet meme going about the right blogosphere for the past few months that’s a quote of the late science fiction author Robert Heinlein.  This quote seems to capture both the state of our economy and the state of our society today.

Throughout history, poverty is the normal condition of man. Advances which permit this norm to be exceeded — here and there, now and then — are the work of an extremely small minority, frequently despised, often condemned, and almost always opposed by all right-thinking people. Whenever this tiny minority is kept from creating, or (as sometimes happens) is driven out of a society, the people then slip back into abject poverty.

This is known as “bad luck.”‘

So, on what does the St Louis Fed President James Bullard blame the lackluster state of the economy’s performance for 2011?  You guessed it, bad luck.

JAMES BULLARD: The economy, I think 2011, you know, I think the chairman said maybe obliquely, but it’s a bit of bad luck in 2011, I have to say. I was expecting better things in 2011. I thought that that would be the year…

HOST: Bad luck for the economy?

BULLARD: Bad luck for the economy.

That doesn’t give me much confidence that the people in charge of keeping the economy humming actually know what they’re doing.  But at least I’m sure now that Heinlein was a prophet.

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