Wednesday, January 23, 2013

Spending Vs. "Borrowing"

"The Fed is Key to Where Stocks are Heading: Ritholtz" is an article posted on Yahoo Finance's "The Daily Ticker" 01/17/2013. The article itself is not relevant to this post, but I bring it up because a fellow named Mike posted this comment to that article: "Every time Ben Bernanke buys government debt with manufactured dollars it is in essence a deferred tax, since it allows the government to spend more money we don't have and it further erodes the buying power of the dollar. These deferred taxes hurt the middle class the worst and of course are destroying our children's future!" What Mike posted was spot on, except that his blame is misguided. I replied: "And you blame it on the fed rather than the politicians because? Suppose the fed didn't do it. If the pols want to spend, they will. Right now, with the fed funding the debt at 1.87%, the yearly price tag is about .0187 x 16,400,000,000,000 or about 306.7 billion dollars per year (of wasted money). Without the fed, can we conservatively put the interest rate that the government would be paying at 5%? Then the cost would be around 820 billion per year and our deficits would be over half a trillion dollars larger. I'm not advocating either scenario, but #2 would be a lot less sustainable." So my question is: Is the federal reserve going to be the United States' financier from now on? Can we really auction T-bills in the open market at even 5%? My guess would be - yes. At least to citizens who are incapable of investing beyond savings accounts and CDs. They would love to get 5%. But I seriously doubt that any sane person would lend money to the U.S. for 10 years @5%. As noted above, if spending on everything else remained constant (ha), we would need to "borrow" over half a trillion dollars more every year just to finance the debt at 5%. As the debt continues to grow, even "borrowing" from the fed at current rates clearly becomes unsustainable at some point. TBC