Sunday, June 20, 2021

A Chart That Keeps Yellen Awake At Nights

 As I wrote in my previous post, short term interest rates rose sharply last week after the Fed signaled the end of ultra low rates.  The effect on the 2 year Treasury note was particularly pronounced, its yield nearly doubling from 0.15% to 0.285% intraday and settling a touch over 0.25% on Friday (Chart below).

 2 Year Treasury Note Yield  

The average maturity of all publicly held US debt (ie excluding Social Security holdings) is currently 5.5 years. Therefore, a rise in the short to medium end of the yield curve is crucially important - and more so now than at any other time in US history, since government debt has soared to 127% of GDP, up from just 105%, in less than 2 years.

While the chart above may raise eyebrows, here's another that must keep Janet Yellen awake at night.  It shows the 2, 3, 5 and 10 year yields;  pay attention to the two lines at the bottom, the 2 and 3 year yields.  They have a long way to go up, to merely equal pre-pandemic levels.  For example, the 2 year could rise a massive seven times! The 5 year, closest to the entire debt’s average maturity, could rise 3.5 times. And we’re not even taking into account the possibility that inflation will stay high far longer than a few months.

Treasury Yields - 2, 3, 5 and 10 Years

 Such rate increases will cause huge problems for the US’s ability to properly service its debt, see the chart below from Yardeni research. And that’s only for marketable debt, ie excluding the Social Security trust fund. An annual interest bill of nearly $1 trillion is clearly unsustainable for the US - given current tax revenues, that is.

So, put all of the above together, and what should, or could, Mrs. Yellen do? Easy answer, really… raise corporate and personal income tax rates (at least for the ultra rich), impose capital gains taxes at the same rate as earned income, and possibly institute a federal VAT. I don’t really see any other, “easy” way out.  Indeed, I believe the recent G7 US initiative to agree on a minimum 15% global corporate tax rate is a first step in that direction.




  1. interesting point abt the G7 tax... the gossip (of us, the very ill informed) is that there is no way they will be able to get everyone to work together on it... especially not if the corporations intend to oppose it... do you know something about that?

  2. It is very very rare for the G7 to agree on something like this, so I think they really mean to do it. After all, they all face huge debts from handling COVID. Big global corporations will have to swallow it, or face even tougher taxes. After all, 15% is a joke…way too low.

    1. Corporations will just migrate to countries not willing to abide by the global tax... no?

    2. you have touched the key point... for it to work, they have to impose punishment on any company that does not comply, even foreign registered ones... this breaks the unspoken rule that has kept the peace since Westphalia, non interference in internal affairs.... the ground is truly shifting under our feet...

    3. Large countries still have massive clout over corporations, if and when they wish to exercise it. You really don’t want to have the FBI, IRS or the Justice Dept. after you, no matter where you are incorporated.

      I believe recouping some of the massive COVID costs is a top priority for every country, so they will coordinate their policies. Smaller countries will just have to play ball.

    4. to be fair, I really dun see how it can work without massive interference into a countries internal affairs that no one will tolerate... however, without that, a country could simply pretend to tax a company then give the money back through the backdoor...

      is the US really going to get involved in every deal? Maybe it could do something like that in places like Panama... but how about Korea, Indonesia, Taiwan, Switzerland, and of course China...