Thursday, February 28, 2013

Sequester This!

In 2012, the total interest expense on the U.S. Government Treasury debt was $360 billion.  For the first 4 months of fiscal year 2013, it's $151 billion.  The Government spent a total of $3.5 trillion in FY 2012.  Interest expense on Treasury debt was 10.2% of the total amount spent by the Government.

It gets more interesting.  Assume the average coupon of Treasury debt is around 2.3% ($360 billion divided by an average of $15.5 trillion outstanding during FY 2012).  Now, what happens if the Fed loses some control over interest rates - for whatever reason, not the least of which is that market forces force the issue - and the average coupon moves up to, say, 4%.  By then assume $17 trillion in Treasury debt.  Then you are looking at $680 billion in interest expense.  Assume the budget remains around $3.5 trillion.  Now interest expense is close to 20% of Government spending.

Apply that math to your own household budget.  If you were spending 20% of your net income before expenses on interest payments, you would have to file chapter 7 bankruptcy and restructure your debts.  The only choice the Government will have is to print more money.  Not only is QE not slowing down or ending, the Fed will unequivocally have to increase QE over time.

Hang on to your gold.

Sequester This Congress/Obama


  1. In FY 2011, total interest expense was closer to $450bn. In FY 2012, feds wrote down approximately $75bn of interest expense related to DoD.

    If that $75bn writedown is 'funky' (as so much of government accounting is), and the current 4-month run-rate reflects reality, then the current average coupon is closer to 2.9%, and interest expense/budget is closer to 12.9%. Ugly.

    We're headed to 20%+, easily. In fact my bet is the only thing which can hold that rate down is expansion of the numerator (gov. spending), which seems likely.

    Hold your gold, indeed. Or better yet, trade some for silver.

  2. Ya I see what you're saying. I was going by this:

    It's really a "handgrenades and horseshoe" proposition in terms of estimating interest expense LOL Even if you're not dead on, close is good enough to make the point

  3. Agreed. By way of clarification of course, by 'numerator' I of course meant 'denominator'.

  4. Doesn't the Fed Gov't get back all the interest they pay to the Federal Reserve? While that obviously presents it's own set of problems, it seems that should be subtracted from your number.

  5. CFTC Derivatives Proposal Would Weaken Rules Meant To Prevent Another Crisis, Advocates Warn

    Previously, trading had occurred mainly over the telephone, in private deals between large players. Congress mandated that most of the trading should be restricted to a central computerized market, a “central limit order book” in industry jargon.

    But a key exception granted traders of very exotic or large derivative positions the right to exchange their wares privately. Critics said that would reduce transparency and benefit the biggest banks that dominate the field.

    In an effort to limit the scope of the trading that could take place under that exception, regulators initially proposed that derivatives traders doing business outside of a central exchange would have to involve at least five so-called counterparties, meaning investors taking the other side of a trade.

    Now, according to people with knowledge of CFTC deliberations, commissioners are pressing a rule that would allow traders to negotiate the sale of derivatives privately, outside the exchange, even when there are only two other counterparties.

    “There were significant compromises made in the Dodd-Frank Act,” said Stanley, the financial reform advocate. “Then the initial proposed regulation had an additional compromise. Then industry lobbyists complained those proposals were too extreme. Now, we’re ending up very close to where we were in 2008.”

    Dennis Kelleher, an advocate for financial reform who leads a Washington-based non-profit Better Markets, argued that the real motive of the change is to enable Wall Street to continue its profitable, but reckless, gambling on derivatives.

    “As we said to Commissioner Wetjen and other commissioners in recent meetings, gutting the … rules will only help Wall Street’s biggest banks continue to control the marketplace and will defeat the purposes of financial reform,” Kelleher said in a written statement. “The law was passed because Wall Street caused the biggest financial collapse since the Great Crash of 1929 and has inflicted the worst economy on the U.S. since the Great Depression. Financial reform is supposed to prevent that from happening again. The CFTC must stand up to Wall Street, reject self-serving, profit-maximizing arguments, and protect the American people.”

  6. Dave, I see what you mean, but also ponder this. If the FED continues to buy 90+% of the US Debt (even as rates go a bit up, it might be the only source of enough cash (fraudulently, newly minted cash) that would do so (???), it (the FED) hands the interest gains back to the treasury, which should somewhat lessen the governments overall interest payments cost. Not that it matters, I think it might only serve to slows down the meltdown of this gigantic ponzi scheme. I'm holding on to my PMs, hell or high water.

    1. Another thing to subtract is debt service on intragovernmental debt. Everyone likes to talk about $16.5 trillion federal debt, but less than $11 trillion is owned by the public. The rest is debt the government owes to itself. That doesn't include the debt on the Fed's balance sheet.

      So, Dave exaggerates a bit, but I get his point. We are vulnerable to the shock of higher interest rates. However, with the economy barely growing even with QEi and $900 billion deficit spending at the federal level, the capacity for rates or inflation to shoot through the stratosphere is severely limited.

      Armageddonists and Hyperinflationists like Dave have to admit it's gets harder and harder to make the case for imminent new bull market in the PM's and miners. I hope he's right, though, since I have 5% of my net worth in the category.

    2. Are you sure the intra-governmental interest expense isn't accounted for in the numbers posted on the Treasury Direct website? If you think it isn't, can you point me to a footnote that explains where the number the Government posts on its own website comes from?

      I'm going by the numbers that posted on the website.

      If you REALLY want to get technical, we need to factor in the debt service expense that is incurred on a cash basis from the Government making payments on defaulted Fannie, Freddie, Ginnie and FHA debt.

      The amount of the FNM/FRE debt debt alone is $7 trillion, but it's not counted "on balance sheet" and the expense of servicing defaulted agency debt is not "on budget."

      How about the interest paid on the special Treasury IOU notes sitting in the Social Security Trust? The last time I saw a number there it was $2.5 trillion. I don't think the interest expense on that debt is in the number posted on Treasury Direct either. I really exaggerating? REEEEALLY?

      The Truth is, we can't quantify exactly how much the Government spends each year and what it exactly spends it on because a lot of what they do "off budget" and "off balance sheet."

      Those are facts.

  7. I find it hard to believe that while the physical markets, especially gold, are so tight and the Chinese are buying huge quantities of gold, the precious metals are so weak...Gold is beyond recognition and silver behaves as if it would reach ZERO and become arsewipe...