The mounting government debt–$2.98 trillion in recent bailouts and stimuli alone–is an oppressive anchor around the neck of every American. Currently, every family of 3 is obliged to pay over $118,000 in the next 30 years. That’s a house payment with a variable-rate. In other words, the government has done exactly what helped cause the mess for individuals by borrowing beyond its means at a teaser rate of 0.8 percent.
That Teaser Rate Will Skyrocket
In order to keep rates low, the Federal Reserve began buying up Treasuries bonds last week. Sort of like your spouse co-signing a loan for you. The idea was that the Fed’s purchases would take some of the notes off the street, driving up the price (scarcity) which would reduce the interest rates.
But it didn’t work. According to the Wall Street Journal on March 31:
The 30-year Treasury yield immediately moved higher Monday after the Fed bought $2.49 billion in long-dated government bonds, jumping as high as 3.656% from an overnight low 3.519%. The yield was pushed below 3.6% in the afternoon session as worries about U.S. auto makers and banks spurred a haven demand in Treasurys.
This will be an oft-repeated story until the Fed’s spent its Treasuries allowance of $300 billion. As the economy perks up (which it will for the next 2 weeks to 2 months), bond prices will fall, pushing up the yield. Those yields will drive up the deficit and the national debt. That’s the adjustable-rate mortgage effect.
US Debt Will Skyrocket
One reason that the deficits were so high under Carter and Reagan but low (actually some surplus) after the GOP took the House and Senate in 1995 was interest rates for government borrowing. Even though Reagan’s rates were cool compare the fever (18+) rates under Carter, they were still much higher at 8 percent under Reagan than they were in the 1990s.
Today, rates are much, much lower than they were in 1998. They are lower than they were late in George W. Bush’s second term when, the Democrats tell us, deficit spending was “out of control.” Even with these all-time low interest rates, Barack Obama and the Democrat Congress have managed to explode the deficit and the national debt.
When rates move up, deficits and debt will move even higher.
Consumers Will Pay
In a sense, the worst thing that can happen to consumers is an economic rebound. With trillions of dollars of cash poised to hit the streets and trillions of dollars of debt to pay, every up-tick in the economy–GDP, stocks, jobs, anything–will increase prices and rates disproportionately.
Think of it this way (but ignore my numbers which are for demonstration only). Suppose you own a stock whose volitility rating is 1.0. That means if the S&P goes up 2 percent, the stock goes up 2 percent. When the budget is close to balanced, that’s how debt, rates, and prices respond to a growing economy. If the GDP grows at the 3 percent, inflation will be around 2 percent.
But our volitility rating is more like 1.5. So a 2 percent increase in the broad market will yield a 3 percent increase in your stock. In terms of inflation, a 3 percent increase in GDP will yield a 4.5 percent price increase. (The GDP:inflation ratio might be much higher than 1.5 considering the amount of borrowing that’s occured in a very short time.) So your salary might go up 3 percent, but your cost-of-living will go up 4.5 percent, leaving you worse off than before.
Unemployment sucks, and I want that rate to fall. But be realistic. Someone who lost a $60,000 job and finds a new $60,000 job will not be back where he started. Even if he managed to survive on savings during the unemployed period, $60,000 will no longer buy what it did before. That’s the problem with inflation: it erodes the purchasing power of the dollar.
Stop the Borrowing! Stop It Now!
The road to meaningful recovery requires the same steps as life-saving:
Stop the Bleeding: stop borrowing
Start the Breathing: cut taxes to drive investment and cash-based spending
Treat for Shock: let communities help those who need assistance until the economy lifts their boats
Currently, the administration is doing none of these. It’s force-feeding anti-coagulants which will increase the bleeding; it’s raising taxes which will deprive the patient of oxygen; and it’s forcing its heavy hand on those in need. Bassackwards.