There was never a time when the title Sudden Debt was more apt than right now. Federal debt has exploded to 130% of GDP (Fig. 1) , and when Mr. Biden’s new $2 trillion program is added it will jump to 140%. Such a debt burden may be acceptable for countries like Italy and Greece, or even Japan, but certainly not for the country claiming to be the Leader Of The Free World and issuer of the global reserve currency.
Talking heads are trying to underplay the (sudden) debt, claiming that what really matters is the annual cost of debt service, currently manageable because of near zero interest rates. Indeed, the average interest rate on all government debt is now 1.7%, down from 2.4% last year (Figure 2).
However, notice that this happened almost entirely because short term (up to 12 months) T-Bill rates have come down to near zero (red arrow above). Outstanding marketable US debt is, in fact, very short term with its average maturity now down to 62 months or perhaps even less (Fig. 3).
Doing just a bit of math we see that the real average maturity of the entire US debt is around 48 months as of 12/31/20. In other words, it’s very short term and thus very susceptible to refinancing risk. In 2019 the government’s interest expense was ca. 1.8% of GDP or 15% of all government revenue. As things stand today these figures are likely significantly higher and slated to rise even further due to Mr. Biden’s additional $2 trillion debt package.
The Treasury is not financing all this additional debt by selling bonds (well, bills mostly) in the open market, of course. They are purchased (or repoed) almost entirely by the Fed which thus prints 100% deficit money to be dumped by the proverbial helicopter onto the US public. The Fed’s balance sheet has ballooned from $4 trillion to $7.5 trillion in less than one year and will go to nearly $10 trillion soon, when Mr. Biden’s $2 trillion are added (Fig. 5).
In case you are wondering, that’s the country’s central bank holding debt equal to almost 50% of GDP. Is it sound banking to lend so much to ONE borrower? Obviously, the Fed’s supposed independence has now gone completely out the window.
Which further begs the question: if the Fed is lender of last resort, savior of the financial system when it crashes... who will save the Fed?
Make no mistake: this has never, ever happened in the US before, not even during WWII which was financed with war loans, bonds and stamps sold to the public.
That's if you ignore the 250 trillion dollar pension debt. But that's not owed to President 10% mates, its owed to the plebs.ReplyDelete
You are referring to the unfunded pension liability which is, indeed, a very serious problem - but it is not debt, per se. Also, the number varies greatly with the assumptions one makes to calculate it, eg interest rates and future benefits. But plain vanilla debt is a clear and present problem, whatever assumptions we make.Delete
Second observation. It shows why the deep state is shitting themselves over Trump 2, the sequel.ReplyDelete
They need him to sign off on the debt ceiling, or they have no income for 4 years.
Maybe stocks continuing to rise are seen as a coming inflation hedge?ReplyDelete
Hey hell, I kind of wonder if camabron is right.... might the correct stock market model be that of Weimar Germany.... those prices never came down. =)ReplyDelete
Anything is possible, IMHO we are in uncharted territory. But Weimar Germany did not issue the world’s reserve currency and its hyperinflation was almost entirely a domestic event. I don’t see how the dollar can be hyper inflated, practically. It is much more likely that the US will try to contain the explosive budget deficits and debt by increasing taxation on the rich and corporations.Delete
But US politicians have historically (since the neoliberal period began under Reagan) being in bed with the rich and corporations. Taxing them aggressively would be a major but unlikely step, no?Delete
Please see today’s post 😊Delete
Any comment on the Gamestop (GME) phenomenon Hells? The pheasant revolution against Wall Street...ReplyDelete
Pump and dump operation. Look who’s the major shareholder...Delete
The “peasants” are not revolting, they’re being used.
Fidelity and Blackrock, ok. Interesting.Delete
Hi Hell. Thanks a lot for your response... I will think on it... This week and next week, I will be madly busy... But maybe after that I will have some time.ReplyDelete