Have nothing to do with the [evil] things that people do, things that belong to the darkness. Instead, bring them out to the light... [For] when all things are brought out into the light, then their true nature is clearly revealed...

-Ephesians 5:11-13

Tag Archives: Interest Rates

Gov’t Collects Record $240 Billion in May; Still Runs $88 Billion Deficit

This article appeared online at TheNewAmerican.com on Friday, June 16, 2017:

English: Medicare and Medicaid as % GDP Explan...

Medicare and Medicaid as % GDP Explanation: Eventually, Medicare and Medicaid spending absorbs all federal tax revenue.

The U.S. Treasury announced on Thursday that the federal government collected more money in May than in any other month in history: $240.4 billion. In the same breath, it said that the government spent $328.8 billion, creating a deficit of $88.4 billion.

From a wage earner’s perspective, it meant that in May the average worker paid $1,572 in taxes but the government spent $2,149, making up the $577 difference by borrowing. Such deficit spending is making the S&P Global credit rating agency increasingly nervous.

Just a week earlier, the agency affirmed its best rating — A-1+ — for the government’s “short term” debt, which means, in its own parlance, that the federal government’s ability to pay its current bills is “strong.” But in the longer term, the agency is far less sanguine. While holding its current long-term rating at AA+ (one full notch below its best rating), it said it’s unable to give the United States its highest rating (AAA) because of “high general government debt, relatively short-term-oriented policymaking, and uncertainty about policy formulation” for the future. It explained what it meant about that “uncertainty”:

Some of the [Trump] Administration’s policy proposals appear at odds with policies of the traditional Republican leadership and historical base. That, coupled with lack of cohesion, not just across, but within parties, complicates the ability to effectively and proactively advance legislation in Congress, particularly on fiscal policy. Taken together, we don’t expect a meaningful expansion or reduction of the fiscal deficit over the forecast period.

And what does it say about what’s likely to happen over that “forecast period”?

The U.S.’s net general government debt burden (as a share of GDP) remains twice its 2007 level. While, in our view, debt to GDP should hold fairly steady over the next several years, we expect it to rise thereafter absent measures to raise additional revenue and/or cut nondiscretionary expenditures.

What does that phrase “next several years” mean? How much time before the government’s national debt explodes upward? Says S&P:

Although deficits have declined, net general government debt to GDP remains high at about 80% of GDP. Given our growth forecasts and our expectations that credit conditions will remain subdued, thus keeping real interest rates in check, we expect this ratio to hold fairly steady through 2020. At that point, it could deteriorate more sharply, partly as a result of demographic trends.

Translation: Deficit spending will remain “subdued” for three and a half years, and then Katy bar the door!

Here is where S&P bows out of the picture, giving way instead to the Congressional Budget Office (CBO), which completed the picture in its March report:

Federal debt held by the public, defined as the amount that the federal government borrows from financial markets, has ballooned over the last decade. In 2007, the year the recession began, debt held by the public represented 35 percent of GDP. Just five years later, federal debt held by the public has doubled to 70 percent and is projected to continue rising.

“Continue rising”? By how much? And by when? The CBO is blunt:

Debt has not seen a surge this large since the increase in federal spending during World War II, when debt exceeded 70 percent of GDP. The budget office projects that growing budget deficits will cause the debt to increase sharply over the next three decades, hitting 150 percent of GDP by 2047.

So, that ratio of government debt compared to the country’s economic ability to produce goods and services was 35 percent in 2007, is now 70 percent, and will soon be 150 percent.

And what’s the reason?

The majority of the rise in spending is largely the result of programs like Social Security and Medicare in addition to rising interest rates. For example, Social Security and major health care program spending represented 54 percent of all federal noninterest spending, an increase from the average of 37 percent it has been over the past 50 years.

It appears to be an unstoppable locomotive. Non-discretionary spending (spending already locked into place by past Congresses and fully expected to be received by its beneficiaries) is on autopilot. And interest rates now coming off historic lows are only going to increase those annual deficits into the future as far as the eye can see.

The CBO is about as close as one can get to a truly non-partisan federal agency — one that has no partisan political agenda and is considered by many as the most reliable forecaster of future economic events. So it’s not only willing to cover, analyze, and present its findings candidly, it’s also willing to tell the truth. It asked, rhetorically, “What might the consequences be if current laws remain unchanged?” It answered:

Large and growing federal debt over the coming decades would hurt the economy and constrain future budget policy. The amount of debt that is projected under the extended baseline would reduce national saving and income in the long term; increase the government’s interest costs, putting more pressure on the rest of the budget; limit lawmakers’ ability to respond to unforeseen events; and increase the likelihood of a fiscal crisis, an occurrence in which investors become unwilling to finance a government’s borrowing unless they are compensated with very high interest rates.

Which brings one to the ultimate rhetorical question: What happens when even those “very high interest rates” aren’t enough to compensate those investors for the risks they are taking by loaning their money to a government that increasingly isn’t able to pay its bills and must continue to borrow increasingly massive amounts to cover its deficits? What happens next?

Former Heritage Economist Stephen Moore Refutes CBO’s Doom & Gloom

This article appeared online at TheNewAmerican.com on Wednesday, April 26, 2017:

Stephen Moore by David Shankbone, New York City

Stephen Moore

The Heritage Foundation’s Distinguished Visiting Fellow Stephen Moore, now a CNN economics commentator, thinks the latest report from the Congressional Budget Office (CBO) is far too pessimistic. Instead, he believes that most of the nation’s fiscal problems can be solved just by prodding the economy.

The CBO report, “The 2017 Long-Term Budget Outlook,” assumed that little would change politically over the next 10 to 30 years, despite promises from President Trump that his policies would “make America great again.” It projected that the Baby Boomers would exhaust the resources of Medicare and Social Security, and then those costs would be shifted directly to the Department of the Treasury.

If nothing changes, said the CBO, the percentage of the national debt held by the public (pension plans, mutual funds, foreign governments, and wealthy individuals) would double over the next 30 years, which would “pose substantial risks for the nation.”

The problem is exacerbated, said the CBO, not only by an aging population demanding that the government keeps its promises to them, but also

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Growing Pension Crisis Looms Over Wall Street

This article appeared online at TheNewAmerican.com on Monday, March 27, 2017:

Logo of the United States Pension Benefit Guar...

Logo of the United States Pension Benefit Guaranty Corporation

The looming state and municipal pension plan crisis, estimated by Moody’s at $1.75 trillion just a few months ago, has now been adjusted upward to  $1.9 trillion. But that number, according to Bloomberg’s Danielle DiMartino Booth, greatly underestimates the level of underfunding. It’s more like $6 trillion “if the prevailing yields on Treasuries were used.”

Instead, most state and local pension plans use a much higher, more generous, and more deceptive assumed rate of return of between six and seven percent, with some still clinging to a “castles in the sky” eight percent. Those assumptions greatly reduce the pressure on plan sponsors to make proper contributions to fund those plans.

And, according to the investment firm GMO (Grantham, Mayo & van Otterloo),

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Trump’s 2018 Budget Won’t Touch Social Security, Medicare

This article appeared online at TheNewAmerican.com on Monday, February 27, 2017:

English: The standard Laffer Curve

The standard Laffer Curve

Treasury Secretary Steven Mnuchin said on Fox News on Sunday that cuts in entitlement programs — i.e., Social Security and Medicare — won’t appear in the president’s budget: “We are not touching those now. So don’t expect to see that as part of this budget, OK? We are very focused on other aspects and that’s what’s very important to us.”

Trump’s budget for fiscal year 2018 (starting October 1, 2017) is expected to be presented to the House on Monday, March 13, just two weeks away. And there are a lot of moving parts that must be glued into place before then.

Those parts include

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Dallas Pension Plan Solution: Everyone Shares the Pain

This article appeared online at TheNewAmerican.com on Wednesday, February 22, 2017: 

Downtown Dallas in the background with the Tri...

Downtown Dallas in the background with the Trinity River in the foreground.

Following the pension plan board meeting on Monday, Presidents’ Day, a decision was made to accept the rough outlines of a proposal by Texas House Pensions Committee Chairman Dan Flynn to keep the Dallas police and firefighters pension plan from going bankrupt. Said city council member Philip Kingston, “Flynn’s [plan] is the best of the bad options.”

Everyone involved will share the pain: some by having their benefits cut back, and some by having the contributions increased.

Under the Summary issued late Monday night:

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Large Pension Plans Adjusting Their Targets Downward

This article appeared online at TheNewAmerican.com on Wednesday, December 21, 2016:  

English: Jerry Brown's official picture as Att...

California Governor Jerry Brown

Heading into negotiations this past weekend between the California governor’s office, teachers’ unions, and pension plan trustees managing the California Public Employees’ Retirement System (CalPERS), Governor Jerry Brown spoke the truth: “There’s no doubt CalPERS needs to start aligning its rate of return expectations with reality.”

Coming out of the meeting, the gap between the plan’s target rate of return and reality remained immense.

The last time CalPERS faced reality and flinched was in 2012 when

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Will Mick Mulvaney Pull Trump’s Financial Fat Out of the Fire?

This article was published by The McAlvany Intelligence Advisor on Monday, December 19, 2016:  

English: Official portrait of US Rep. Mick Mul...

Michael “Mick” Mulvaney (shown) rode the Tea Party wave in 2010 into Congress, replacing a 14-term Democrat from South Carolina’s 5th District. He has been handily reelected ever since. He took his oath of office seriously, saying in 2010 that “If political reporters want to know what drives the Tea Partiers, it is their belief in the Constitution. That’s what has always driven me in politics and will guide me in Congress.”

He remained as true to his word as any of those riding the same wave,

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Simmering Greek Financial Crisis Explodes Once Again

This article appeared online at TheNewAmerican.com on Thursday, December 15, 2016:  

Under the terms of its last bailout, Athens (above) was required not only to continue to impose harsh austerity terms (higher taxes, less government spending, better accountability, and increased tax collection enforcement onto Greek citizens) but to inform the unelected “higher” European authorities of any change in those terms by Athens.

Last week Athens unilaterally

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California’s Pension Plans Report Dismal Results, Increasing Shortfalls

This article appeared online at TheNewAmerican.com on Wednesday, July 20, 2016:  

Ted Eliopoulos, the chief investment officer of the country’s largest pension plan, the California Public Employees Retirement System (CalPERS), did the best he could with the bad news: “Positive performance in a year of turbulent financial markets is an accomplishment that we are proud of.” That “positive performance” was a measly 0.61-percent return from July 1, 2015 through June 30, 2016, on his $300 billion pension plan. That means that the fund is now about $100 billion short of meeting its future obligations.

But that $100 billion number greatly understates the real liability because it’s based on a pixie-dust assumption that the plan can earn an average

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Latest CBO Report “Grim”; Offers No Solutions to National Debt

This article appeared online at TheNewAmerican.com on Friday, July 15, 2016:  

Ida May Fuller, the first recipient

Ida May Fuller, holding the first check from the Social Security Administration

On Tuesday, the Congressional Budget Office (CBO) published its annual report on the country’s long-term budgetary and financial outlook. One need only to see the chart on Page One of the report to see why CBO’s Justin Bogle said the outlook was “grim”: It shows government spending growing so much more quickly than anticipated revenues that annual deficits will likely triple in the next 30 years, if not sooner. Bogle called this scenario unsustainable.

For the first time, the CBO built into its assumptions the projected impact of ObamaCare, the country’s declining birth rate, the explosion of Baby Boomers demanding benefits from Social Security and Medicare over that period, plus Boomers’ increasing life expectancies and the increasing costs of providing them healthcare along the way.

It also assumed that government debt will

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Trump Suggests National Debt “Deal,” Media Calls It “Fanciful” and “Dangerous”

This article appeared online at TheNewAmerican.com on Monday, May 9, 2016:  

A snippet from Donald Trump’s conversation with CNBC on Thursday raised the ire of numerous media commentators, who called Trump’s plan “unprecedented” (CNBC), “fanciful” and a “threat” (New York Times), and “tantamount to a debt default” (Yahoo Finance). Others called his remarks “reckless,” while Tony Fratto, a former Treasury official in the George W. Bush administration said, “This isn’t a serious idea — it’s an insane idea.”

What sparked the ire? The initial impetus was when Trump said, “[The U.S. Treasury is] paying a very low interest rate. What happens if that interest goes up two, three, four points? We don’t have a country. I mean, if you look at the numbers, they’re staggering.”

Indeed they are. The U.S. Debt Clock shows the national debt closing in on $20 trillion, while the economy is slumping along, with a GDP at just over $18 trillion. Put another way,

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Evidence Mounts for U.S. Recession in 2016

This article appeared online at TheNewAmerican.com on Monday, March 14, 2016:  

Nearly everyone with an opinion is warning about the increasing probability of the United States entering a recession — two quarters of negative growth — before the end of the year.

Cabinet - Class Photo, 1984: Front row: David ...

President Ronald Reagan’s former budget director David Stockman (middle, left) has been negative on the economy for months, noting in early February that

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Fourth Republican Debate: Feisty, Hilarious, Little Change in Polls

This article appeared online at TheNewAmerican.com on Wednesday, November 11, 2015:  

A more orderly and respectful atmosphere surrounded the fourth Republican debate on Tuesday night, a sharp contrast to last month’s debate where the moderators became the issue. That didn’t mean there were no fireworks, or disagreements, just that the tone was more serious, as the candidates tried to shore up their positions and their poll numbers as they approached the final debate in December.

The topics included questions on

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Federal Deficit at Eight-year Low; Don’t Celebrate Yet

This article appeared online at TheNewAmerican.com on Friday, October 16, 2015:  

On Thursday the Treasury Department announced that the federal deficit for the 2015 fiscal year, which ended September 30, fell to an eight-year low — $439 billion — thanks to tax revenues that grew at a rate faster than government spending. Revenues, according to the department, grew by eight percent over last year while government spending grew by five percent.

Treasury Secretary Jacob Lew celebrated:

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“Operation Car Wash” is Sinking Petrobras, and Brazil as well

This article was published by The McAlvany Intelligence Advisor on Monday, September 28, 2015:  

Like flies attracted to honey, Brazilian politicians saw their opportunities and took them. Initially a money laundering investigation in Brazil focused on just one company, a manufacturer of electronic components that was being used by a criminal ring to hide and whitewash its illegal gains. The owner, Hermes Magnus, apparently discovered the activity back in 2008 and notified local police.

By March 2014 the investigation had spread to more than 230 individuals, including

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John B. Taylor: Perfect Example of Hubris-Lathered Economist Who Thinks He Can Steer the Economy

This was article was published by The McAlvany Intelligence Advisor on Wednesday, September 16, 2015:  

John B. Taylor, economics professor at Stanford University (where he got his PhD), thinks the massive, highly complex U.S. economy, generating nearly $20 trillion of goods and services every year, can be fine-tuned with rules and policies. Further, if those rules can be implemented clearly, the economy will do even better. He thinks of the economy as one gigantic organism with a mind and purpose of its own. That’s why he likes Fed Chair Janet Yellen:

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Interest-rate Increase Could Trigger Global Recession

This article appeared online at TheNewAmerican.com on Tuesday, September 15, 2015:  

Series 1934 $5,000 Federal Reserve Note, Obverse

Series 1934 $5,000 Federal Reserve Note, Obverse

With every eye focused on the Board of Governors’ meeting of the Federal Reserve System on Thursday, expecting the earth-shaking announcement that it will, or won’t, raise interest rates for the first time since January of 2008, few are considering the global implications if it does.

Expectations in the very short run are modest. The debate centers on whether rates should be increased by a tenth of a percent, or a quarter of a percent. In the real world it isn’t likely to matter: New car loans will be adjusted upward by a couple of dollars a month and new home loans will increase by perhaps as much as $50 a month, probably less. This is likely to galvanize some fence-sitters into action, drawing future purchases into the present.

The real impact in the long run, however, is several-fold:

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The Biggest BRIC is Falling

This article was published by The McAlvany Intelligence Advisor on Monday, September 14, 2015:  

Collection of Chinese renminbi yuan banknotes....

Collection of Chinese renminbi yuan banknotes.

In his 2001 paper “Building Better Global Economic BRICs,” chairman of Goldman Sachs Asset Management Jim O’Neill developed the acronym for Brazil, Russia, India and China. He made the case that the BRICs symbolized the shift of global economic power away from developed nations, estimating that they might overtake the G7 nations – Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States – as early as 2027.

Modifications were necessary to dampen O’Neill’s enthusiasm, with GS recalculating that it wouldn’t happen before 2050. By December 2012 the Council on Foreign Relations, in itsForeign Affairs publication, was forced to refute even that modest projection:

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Chinese Economy, Stock Market Continue to Crater

This article appeared online at TheNewAmerican.com on Monday, September 14, 2015:  

News that China has offloaded more than $100 billion of U.S. Treasuries in August to support its currency and its cratering stock market caused many observers to raise concerns about China waging an “economic war” against the United States. It’s a threat the Chinese last expressed during the 2012 presidential election, that Beijing would “use its financial weapon to teach the U.S. a lesson” if it insisted on flouting Chinese interests, i.e., by selling arms to Taiwan, for example.

It now appears that the shoe is on the other foot. The Asian tiger is now a pussy cat, as its economy continues to crater and the Chinese central bank moves to weaken its currency and shore up its stock markets.

In the days following Beijing’s surprise announcement on August 11 that it was devaluing its currency by two percent, the yield on the U.S. 10-year Treasury note jumped 10 percent, from

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The Ripple Effect of Rising Interest Rates

This article appeared online at TheNewAmerican.com on Wednesday, September 9, 2015:  

With financial talking heads now convinced that the Federal Reserve will finally increase interest rates as a result of the record-setting job openings report, few are asking about the “ripple effect” those increases might mean for individuals, for the auto and the housing industry, for companies and corporations, and, most importantly, for the debt-laden federal government.

If and when the fed announces upcoming interest-rate increases, in the short run, individuals might be tempted to accelerate their buying decision on cars and houses to take advantage of low rates before increases start flowing through to lenders in those sectors. In the longer run,

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Many of the articles on Light from the Right first appeared on either The New American or the McAlvany Intelligence Advisor.