The problem with the current economists is they never dropped acid……It will take a former Timothy Leary devotee, like yours truly, to think of a way out of this economic mess. Any logical individual applying traditional economic theories would draw the conclusion that US credit quality and resulting rating will deteriorate rapidly in the near term, resulting in higher US Govt. interest rates on Treasuries. The problem is about $3-4T of US debt will be issued annually for the foreseeable future in the form of new debt and debt rolling over If rates go up by a point, or two, or three, the effect on the US budget will be unimaginable. (Let’s not even get into the fact that the majority of US debt is off Balance Sheet debt in the form of unfunded Social Security and Medicare).
Currently, annual US tax revenues come in at around $2T and annual interest on the national debt at around $200B. However the average interest rate for all interest bearing debt fell to 3.29% at the end of 2009. At the end of 2009 total public debt outstanding was $14T and was 99.3% of GDP of $14.1T. At year end 2009 43% of US public debt needed to be rolled over within 12 months. The average maturity was around 50 months. So some back of the envelope calculations: If around 40% of US public debt is due within 12 months, and the current average interest rate on that debt is .25% that is .25% times $5.6T, or about $15B annualized. If over the course of 1 year the interest rate jumped back up to the historical short term average of 3%, ridiculous I know but just for argument sake, that would increase the interest expense on $5.6T of debt 12 fold from $15B annualized to $180B annualized, on just that part of the debt. Longer term rates would go up in tandem. So quickly, very quickly indeed, we could see total interest expense double to around $400B or triple to $600B. If US debt were downgraded from AAA to some lower level, possibly even junk, then the interest rates could go to $1T annually, half of the current tax receipts. In addition US tax receipts are projected to be below expenditures by about $1T per year for the next 10 years.
So if the US Govt. raises tax receipts from $2T annually to $3T annually which is 50%.....that is insufficient to fund the projected deficits and increase in expenditures due to the higher interest rates even in the most conservative scenario above. If the more pessimistic scenario comes to pass, then even a doubling of tax receipts would not work. So the budget expenses would have to be cut and cut dramatically. This simply will not occur.
In essence the United States is like a person who has unknowingly run through a glass door, and noticed part way through. To go back against the glass, which is now broken but broken in the direction of the forward motion, would cut and bleed and kill. The only solution for that person is to keep running through. To shatter all the glass, to completely break the door, but at least be through it….
So how to do this – this would be the headline news:
“”””””The Federal Reserve announced today a bold new quantitative easing program to lead the United States economy to the next millennium. The program boldly embraces the Feds dual mandate of maximum employment and price stability. The program is called “All In” named after a manner of placing a wager in Texas Holdem. The Federal Reserve forthwith issues a standing order to purchase all newly issued United States Treasury Notes and Bills issued at Public Auction at even par. Any investor who desires to enter a bid is welcome to make an offer with par as the floor. Highest bids will continue to be accepted in the best interest of the United States taxpayer, but by purchasing any newly auctioned debt at par the Federal Reserve is essentially creating an intrinsic fair value floor for US debt. This fair value floor is consistent with the status of the United States as the premier economy in the world, the central marketplace for goods and services, the deepest credit and equity markets in the world, and the status as the global default currency under which world wide trade is settled. It is in the interest of global price stability that such an intrinsic floor value is created for all US Govt. debt.
In addition under “All In” the Federal Reserve will redeem any maturing treasury debt at par through the secondary market. This commitment guarantees all holders of US debt the full face value of their investment. This commitment is backed by the full faith and credit of the United States of America.
What does this accomplish? It maintains interest expense on US Govt. debt at stated interest. It fixes interest rates at par. The budgets submitted to Congress will not require increased allocation to interest expense. The Govt. can continue this program indefinitely until the deficits are eliminated. No social programs are cut, no decreases in defense spending. Dollars flow….Price inflation returns, and the threat of deflation or second depression are ended. Such measures may require commensurate restrictions on the flow of foreign held US dollars into the United States to mitigate potential inflation. The flow of foreign dollars into the US can be maintained at levels commensurate with the Federal Reserves target inflation.
The “All In” Fed program takes effect at Monday morning’s open……”””””””””
-Michael
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