Why it may be all over for America, no matter what we do
Imagine if you took several million police, firefighters and teachers, lined them up against a wall, and read the following:
The $60,000 (or so) salaries you’ve been getting, forget about it. We’re cutting your pay to something more like $10,000 to $20,000. No vote, no appeals, done deal.
Doesnt sound pretty, does it?
Yet, what if you took several million widows, lined them up against a wall, and said:
The $60,000 (or so) income you’ve been getting on your savings, forget about it. We’re cutting your pay to $10,000 to $20,000. No votes, no appeals, no nothing.
The thing is, the widow story actually happened.
In January, 2008, the yield on one-year treasuries was 3.17%. By year end, it was 0.37%. Today, it’s 0.23%, or 23 percent of a percent. (Historic yield curve data is here: http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield
It may be that you just don’t care about risk averse folks whose savings, because of Federal Reserve policies, are being kept to dog-food/cat-food levels.
Here’s why you should.
By all accounts, the federal government will hit its allowable debt ceiling of $14.3 trillion in late April or early May. All eyes are on whether or not to raise that ceiling, by how much, and how to restrain the beast which is borrowing more and more of American’s and the world’s wealth.
It is all a liability story. Very little if any attention is being paid to the asset story. That is to say, Treasuries are by definition the safest way of receiving payment back of principal and interest in American dollars. They may be depreciated dollars, but we’ll repay the notes one way or another.
These bills, bonds and notes are being used for something, however. They support not only the incomes of suburban widows etc, but also the actuarial obligations of pension and foundation funds everywhere. Most of these funds assume incomes on their portfolios of 6 or 7 or 8 percent. If not that, then 4 or 5. Yet because of the purchases made by Bernacke’s Qantitative Easing I and II, rates were driven down to essentially zero on much of the debt.
I fear for the future viability of the nation for the following reason: Keep rates low (assuming it was possible which it isn’t) and there isnt enough income for all sorts of costs to be covered. Think union pensions, scholarship funds, retirement savings. Yet the amount of federal debt has grown so high, that allowing interest rates to reach a market-clearing level might demand so much more money for debt service that it’s almost unaffordable.
Think 100% of the Social Security trust funds invested here.
Layer on top of this the demographic hill we must climb: life expectancies expanding, Baby Boomers retiring, Social Security payments rising, health care costs exploding.
I agree that what is going on now is a long-delayed discussion of just exactly what we can afford, and how we are to pay for it. Yet, if it we were all sitting around a table discussing a family budget, then getting enough income for Granny to live comfortably on her savings flies directly in the face of the family’s ability to service our accumulated debt.
One part of the family provides healthcare to the many many others. The way it works is that those cousins collect premium, holding the others funds and using the premiums to cover claims, reserves for future claims and administrative needs. Their profit derives from the ability to earn income on the funds while in their hands. By depriving them of income from the capital and reserves, we are either forcing them to speculate with stocks, raise our costs, or wither and give up.
In the end it isn’t going to matter anyway. That’s because with rates better and going higher in other economies of the world, more and more of our currency is being liquidated to buy Euros, Australian dollars, and Brazilian deposits. As long as our currency was a store of value, it stood as the world’s reserve. The more we trash it, the more attractive Chinese and other deposits become as alternatives, making our debt harder to sell, our rates higher, and our debt service more painful.
I am appreciative of everything Paul Ryan is doing to get a handle on this, but I am fearful that we have gone so far the problem is not exactly fixable.
Granny; the good news is that your income’s going up. The bad news is that it buys less and less each day.