Sunday, August 12, 2018

Fed's rate hike strategy at the point of no return as dollar rising too fast and interest on debt threatens U.S.'s ability to borrow

One of the biggest mistakes that that the Federal Reserve made following the 2008 Financial Crisis was in going all in for a program of long term money printing (Quantitative Easing), as even the most rabid Keynesian with a modicum of financial sense knows that using credit to boost an economy should only be done for short periods of time.

And sadly this failure to allow financial systems to dissolve their bad or toxic assets instead of backstopping them has now brought the world to the brink of insolvency, and perhaps even a crisis 10 times worse than what took place a decade ago.


One of the important things economist John Maynard Keynes stated when using government spending to stimulate recessionary economies is that during the boom times, these same governments needed to accumulate surpluses which could be used to pay off the debt that comes during slower economic periods.  But when the Federal Reserve, European Central Bank, Bank of England, and especially the Peoples Bank of China began their historic credit expansion in 2009, all of these nations were already deeply into debt, and running budget deficits despite five to six years of economic boom.

Now in 2018, pretty much all the benefits of credit use and spending has reached the point of diminishing returns, and what has come out of this are all the negative consequences such as rising inflation, and escalating interest payments that far exceed an economy or taxpayers ability to pay on.
According to the latest Monthly Treasury Statement, in June, the US collected $225BN in tax receipts - consisting of $110BN in individual income tax, $91BN in social security and payroll tax, $4BN in corporate tax and $20BN in other taxes and duties- a drop of 2.9% from the $232BN collected last July and a reversal from the recent increasing trend... 
But while out of control government spending is clearly a concern, an even bigger problem is what happens to not only the US debt, which recently hit $21.3 trillionbut to the interest on that debt, in a time of rising interest rates.As the following chart shows, US government Interest Payments are already rising rapidly, and just hit an all time high of $538 billion in Q2 2018.  - Zerohedge

According to many analysts, for each 1% move higher in interest rates the Fed implements the cost to the budget increases between $225 and $250 billion dollars.  And those estimates were based on a $20 billion national debt which do not take into account the fact that the government will be increasing this debt by at least $1 trillion per annum in deficit spending.

In addition, worldwide global debt is around $237 Trillion, with it increasing by more than $8 trillion each year.  And when you couple this with the fact that global GDP is only $78.28 Trillion, the debt to gdp ratio is over 3:1.

At a time when real inflation is moving back towards levels not seen in the West since the 1970's, and economic growth is signalling strong slowdowns across the board, the U.S. is caught in a vice of desperately needing to borrow more and more money, but at interest rates which will inevitably eat up more and more of their budget.  And perhaps this is why the Fed is subtly trying to scapegoat President Trump as the harbinger of the coming collapse since they know deep down their credit expansion strategy has now gone past the point of no return.

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