Remember last fall when a bunch of Nobel economists assured us that gobs more spending by Joe Biden wouldn't have serious inflationary impacts?

 Here's what the ring leader of Tom Nichols' vaunted expert class of economists had to say at the time:

Some, however, have invoked fears of inflation as a reason to not undertake these investments. This view is short-sighted. ... We need safe school buildings and bridges, and affordable child and elder care, whether inflation is 2% or 5%. With the investments being financed by tax increases, the inflationary impacts will be at most negligible ...

The Build Back Better package ... would transform the U.S. economy to be more efficient, equitable, sustainable, and prosperous for the long run, without presenting an inflationary threat.

From Joe Stiglitz' letter last September, here. Robert Shiller of all people signed on to this load of hooey. Carl Schramm unloaded on all this yesterday, here.

Stiglitz wrote that with a straight face when inflation had already soared to 5.3% in July. The orgy of coronavirus spending in 2020-2021 was already stoking the inflation engine, but the experts then simply ignored it, and called for more! more! more!

Now look where we are, even without more.

Government spending in the United States hasn't been financed by tax increases in decades. We wouldn't be $30 trillion in the hole if it were. It's financed by borrowing, and the interest payments on that borrowing progressively accumulate to crowd-out other spending. One day soon interest payments on the debt will become the biggest part of the budget, severely limiting our ability to allocate resources responsibly.

 

 

Interest payments on the debt averaged $411 billion under Obama, highest ever despite interest rates manipulated to the lowest ever

GDP less interest payments on the debt 2006-2012 is net positive $44.1 billion, that's all

Nominal GDP, not seasonally adjusted, for the seven years 2006-2012 totals $2,941.8 billion.

Nominal interest payments on the debt for all the same fiscal years totals $2,897.7 billion.

And people wonder why we're not growing when all we've got is a measly $44.1 billion to show for it.

Interest payments on the massive debt of $17,609 billion are gobbling up economic growth.

Think of it this way. The seven year average interest payment on the debt, $414 billion annually, represents a simple interest rate of 2.35% on today's balance. That's what the economic growth rate should look like. Instead, last quarter it was -2.9%, down almost $74 billion seasonally adjusted, and negative $118 billion real.

The huge public debt is the drag on the economy, and would be the knee on the chest of the heart attack victim if the Federal Reserve didn't suppress interest rates the way it is doing. 

American Businesses Have Saved $2.8 Trillion In Last Four Years Due To ZIRP

In the form of lower borrowing costs, according to this story from Bloomberg:

America’s companies, from Apple Inc. (AAPL) to Verizon Communications Inc., are saving about $700 billion in interest payments with the Federal Reserve’s unprecedented stimulus. ...

Savings of about $700 billion represents the difference between what companies that have sold bonds since Sept. 17, 2009, are paying annually based on an average maturity of nine years for securities in the Bank of America Merrill Lynch U.S. Corporate & High Yield Index, versus what they might have paid before the crisis.

After rising as high as 11.1 percent on Oct. 28, 2008, it wasn’t until Sept. 17, 2009 that yields fell below the pre-Lehman average of 6.14 percent, the Bank of America Merrill Lynch index shows.

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Just another reason corporate profits after taxes have skyrocketed to another record seasonally-adjusted annual rate of $1.83 trillion for Q2 2013.

Big Deal: Debt To GDP Ratio Comes In At 105%

The debt as of 4/24/13 was $16.7943 trillion. GDP in the latest report was $16.0102 trillion. So the one divided by the other yields 1.05, or 105%. To which I say, Big deal.

In other words, the current annualized national income no longer is sufficient to cover what we owe. But there is no situation in which anyone stops consuming and simply works for a year to pay off everything one owes. At this you'd last maybe 40 days if you were Jesus Christ, but trust me, you aren't Jesus Christ. This is not the way to look at it. Instead, we should look at the debt like a mortgage.

Interest payments on this ever-growing debt in fiscal 2012 came to $360 billion, implying an interest rate paid of a little more than 2%. This rate is artificial. It is the result of manipulation afforded to us by the Federal Reserve's deliberate policy we affectionately call ZIRP, zero interest rate policy, which pushes long term interest rates down into the cellar. A more realistic rate would be double that, 4%, about a half point higher than current averages for 30-year mortgages (call it an extra penalty for having less than AAA status if you want). So, if one were to treat the total public debt outstanding like a mortgage amortized over 30 years at 4% fixed, our "mortgage" payment to pay off the debt would be $80.304 billion monthly, or about $964 billion a year. And you'd have to stop deficit spending.

In the current spending environment, $964 billion annually is about 25% of current government outlays of $3.8 trillion. Current government receipts, however, have lagged the outlays by about $1 trillion annually, so the "mortgage" payment would be closer to 35% of income.

Responsible persons all over this country pay off mortgages with that percentage of income devoted to debt service, and they do it all the time. It's high time the federal government started acting like them. In order to do so, however, current spending apart from the "mortgage" payment would have to be cut $1.96 trillion annually, or 48%, to $1.84 trillion annually for all programs. (That squealing you hear is the sound of stuck pigs).

Somebody get on this right away.     

Interest Payments On The Debt Are Not Counted As GDP

So says this guy, here, discussing government spending for GDP purposes:

d. Interest paid on government bonds is NOT counted as part of GDP; the argument is that the interest is not usually for a loan purchasing capital equipment, and therefore is not connected to production; whereas net business interest typically is for a loan used to purchase capital equipment and is counted as part of GDP since it is related to production.

Interest Payments On The Debt Continue To Consume GDP Gains

Interest payments on the debt are reported here.

For the 7 fiscal years from 2006 to 2012, interest payments have totaled $2.898 trillion.

GDP has gone from $13.399 trillion in 2006 to $15.811 trillion annualized in the third quarter of 2012 (using BEA and Federal Reserve z.1 Release figures), up just $2.412 trillion, which means we're still in the hole $486 billion after 7 years.

I don't see the so-called money multiplier working too well here. And for all I know, these interest payments are probably double-counted, so to speak, showing up as GDP, so it's even worse than it looks. It's government spending, isn't it?

You can't borrow your way to growth.

Interest On The Debt 2007-2012 Has Completely Swallowed GDP Growth

Using the numbers from the June Z.1 release from the Federal Reserve, combined with the latest revisions to GDP from the Bureau of Economic Analysis, I'm showing current GDP, Q2 2012, at $15.596 trillion. GDP in 2006 was $13.377 trillion, for a nominal gain of $2.219 trillion over the period.

The Treasury Department indicates that for fiscal years 2007 through 2011, interest payments on the debt have totaled $2.132 trillion. Extrapolating to twelve months for fiscal 2012 from nine months so far, I add an additional $504 billion to get $2.636 trillion in interest payments over the period, for a net loss of $417 billion. If I forget the current fiscal year and substitute 2006, interest payments have totaled $2.538 trillion, for a net loss of $319 billion.

Either way, America isn't growing at all, and hasn't since 2006. In point of fact, America is in decline. Our national income is not growing sizeably enough even to keep pace with interest payments on the debt.

Ask many people who have gone bankrupt in recent years if they are familiar with the phenomenon of more going out than coming in.

Q2 2012 Anemic GDP Nearly Swallowed Whole By June's Debt Service Payment

WTOP reports the annualized dollar figure for Q2 2012 GDP at almost $118 billion, here:

Current-dollar GDP increased at an annual rate of $117.6 billion in the second quarter to $15.6 trillion.

Unfortunately, interest payments on the public debt swelled in June to nearly $104 billion:

The debt service shark just chomped the thing down, leaving the head and shoulders on the beach.

HELOC Required Payments Are Set To Explode Between 2012-2018

Today, just $11 billion in home equity lines of credit require both principal and interest payments. By 2018 the number will be ten times that, $111 billion.

The four biggest banks alone hold HELOCs with credit lines approaching $300 billion.

Gretchen Morgenson has many of the details at The New York Times, here.

It is unclear from the story just how many first mortgages already underwater also have HELOCs. It is widely estimated that 25 percent of firsts are underwater. Add HELOCs on top of any of those and both lenders and borrowers are back in a world of hurt, as if they had actually gone anywhere but the purgatory we now inhabit.

Since 2005, Interest Payments On Federal Debt Have Consumed 91% Of GDP Gains

YEAR GDP INTEREST (billions of dollars)

2005  770  352

2006  754  406

2007  651  430

2008  263  451

2009 (352) 383

2010  587  414

2011  568  454

2012  360  408 (estimates)

GDP gains for the eight years come to approximately $3.6 trillion. Interest on the debt for the same years comes to approximately $3.3 trillion.

We are barely treading water. This is why the Fed is obsessed with interest rates. Any uptick in interest rates without an uptick in growth and the sheer size of the debt to be serviced will crush us.

Interest on Federal Debt Topped $454 Billion in Fiscal 2011

So says the US Department of the Treasury here.

With fiscal 2011 receipts running at $2.3 trillion according to Treasury here, interest payments now represent 20 percent of federal revenues. Since we're spending $1.5 trillion more than we presently took in, you could say that almost a third of this deficit spending is interest payments.

Total US government debt is running at approximately $15 trillion, so an interest payment of $450 billion per fiscal year implies an interest rate of about 3 percent.

Double that interest rate to 6 percent and interest payments balloon to $900 billion and 40 percent of current revenues.

Mark Steyn recently had some unhappy, pornographic thoughts about that, here:

R.I.P.

[W]ere interest rates to return to their 1990-2010 average (5.7%), debt service alone would consume about 40% of federal revenues by mid-decade. That's not paying down the debt, but just staying current on the interest payments.

And yet, when it comes to spending and stimulus and entitlements and agencies and regulations and bureaucrats, "more more more/how do you like it?" remains the way to bet. Will a Republican president make a difference to this grim trajectory? I would doubt it. Unless the public conversation shifts significantly, neither President Romney nor President Insert-Name-Of-This-Week's-UnRomney-Here will have a mandate for the measures necessary to save the republic.








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Michael Barone Joins The Liberal Chorus Attacking Progressive Taxation

You heard me right, the liberal chorus attacking the progressive tax code, in this case the progressive tax code's deductibility provisions which are . . . well, progressive.

Barone and other liberal Republicans like Pat Toomey, Gang of Sixers and Gang of Twelvers do it on the grounds that the deductions for mortgage interest and state and local taxes help the $100K+ set more.

Nevermind "the rich" already pay the vast majority of the taxes. They want to make them pay even more because . . . well, they don't really need the money, and government does! And maybe liberals will like us more.

Talk about ceding the moral high ground to the left. Who would want to go to all the trouble of becoming rich just so that they can have the privilege of paying even more of the taxes?

Nevermind that the poor own one of the biggest "tax loss expenditures" in the form of transfer payments for the Earned Income Credit and the Child Tax Credit: $109 billion. Compare that to the mortgage interest deduction's tax loss cost to the Treasury : $88 billion.

Here is Barone:

[T]he big money you can get from eliminating tax preferences comes from three provisions that are widely popular.

The three are the charitable deduction, the home mortgage interest deduction, and the state and local tax deduction. ...


[T]he vast bulk of the "tax expenditures" -- the money the government doesn't receive because taxpayers deduct mortgage interest payments from total income -- goes to high earners . . ..


Well why shouldn't they under a progressive tax system? 


There's really no difference between Michael Barone and Republican advocates for "tax reform" and Democrats like Peter Orszag, for example, who makes an argument for similarly flattening deductibility for the rich by limiting their traditional deductions enjoyed by everyone across the income spectrum. What this amounts to is an admission that the progressive deductibility which we have now does NOT go hand in hand with the tax code's progressive taxation.

The current arrangement may not seem fair to flat taxers, but it is internally consistent. If you pay progressively more in taxes, your deductions should justly be progressively worth more to you. And so they are. If you pay progressively less in taxes, your deductions should justly be worth less to you, progressively. And so they are.

Proposals to limit deductions for one class of taxpayers amount to destroying the internal coherence of the progressive tax code itself. It is nothing less than an attack on the idea of progressivity and its fair unfairness, all in the name of extracting even more from the pockets of successful people.

Sheer nincompoopery. 

Liberals Love Progressive Taxation. Progressive Tax Deductions? Not So Much.

Peter Orszag for Bloomberg here likes the idea of flat tax deductions for some reason, but not flat taxes.

Maybe it's because such equality in deductions would increase the taxes paid by the top 25 percent of taxpayers, who already contribute the vast majority of the government's revenue. Orszag sees no reason why a person in the top marginal tax bracket should have his taxes reduced at that marginal rate by a deduction for a 401K contribution, or a mortgage interest payment, or a donation to charity. He wants the deduction to be a flat deduction for everyone, regardless of income, which sounds to me like an admission that there's something actually immoral about progressivity in the tax code.

Sounds like progress to me, the logical implication of which is that the tax rate also should be one flat rate for all.

In the meantime it remains that "tax reform" is to "progressive" as "tax increase" is to "liberal." The name has been changed to disguise the guilty.

Treasury's Own Figures Show It Has Plenty of Cash Flow To Pay Seniors

[A]ccording to the Daily Treasury Statements published by the U.S. Treasury Department, the ongoing flow of federal tax revenue since the Treasury declared that it had hit the debt limit on May 16 has been more than sufficient to cover the combined costs of federal spending on interest payments, Medicare, Medicaid, Social Security, the Veterans Affairs department and federal workers wages and insurance benefits (including wages and insurance benefits for military personnel).

All the figures follow at the link here.

'Uncle Sam Would Not Qualify For A Home Mortgage'

So says Bill Wilson of Americans for Limited Government here:

Currently, the U.S. is paying about 3 percent interest on the $14.3 trillion debt, or $430 billion of gross interest payments every year. If we had to repay everything over the next 30 years, principal and interest owed would amount to $908 billion out of revenue every year. That’s 41.7 percent of this year’s $2.174 trillion projected tax collections.

Is that affordable? Would repayment even be possible today? Perhaps just barely. The benchmark total debt service ratio for mortgage lenders is 40 percent. Anything above that, and a prospective borrower would not qualify for a loan. So even today, Uncle Sam would not qualify for a home mortgage.

I think the situation is much worse than that.

I remember that way back in 1990 the debt service ratio for a residential mortgage loan was much lower than 40 percent. Your mortgage payment had to be no more than 28 percent of income, and all your debt payments combined, adding in automobile and credit card debt, could not exceed 36 percent of income. Higher than that and you didn't get the loan.

By that standard, the US government today isn't even close at 41.7 percent, and would be laughed out of the bank.

The over-spending must stop.