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I am a bank loan officer.
Someone that wants to borrow some money comes to me, proposing to borrow a substantial amount of money.
This person’s income is less than the expenses the person is now responsible for, and this will continue to be the potential borrower’s position going forward.
I ask the person why I should lend them the money when they seem to be getting further and further into debt with no end to the borrowing in sight.
The answer I get:
“With interest rates at historic lows, the smartest thing we can do is act big.”
Whoa! Where do I go with this?
In this case, however, the potential borrower is none other than Janet Yellen, U.S. Treasury Secretary. The incident is reported in the New York Times.
The situation. Ms. Yellen is being interviewed for confirmation to the position she now holds in the government by Congress.
“Neither the president-elect nor I, propose this relief package without an appreciation for the country’s debt burden.”
“But right now, with interest rates at historic lows, the smartest thing we can do is act big.”
Low interest rates are fine if you never have to refinance your debt.
But that is not the case for the U.S. government.
The Problem
Brian Riedl is quoted in response in the New York Times article. Mr. Riedl is a senior fellow at the Manhattan Institute:
“The United States was unwise to make long-term debt commitments based on short-term, adjustable interest rates.”
“Adding new debt as interest rates rise would be pouring fuel on a fiscal fire.”
In summary, Mr. Riedl adds:
“Basically, Washington has engaged in a long-term debt spree and been fortunate to be bailed out by low interest rates up to this point.”
“But the Treasury never locked in those low rates long term, and now rising rates may collide with that escalating debt with horribly expensive results.”
As a bank lender, as a bank CEO, I cannot conceive of my bank making a loan to someone just because interest rates are at historic lows.
That is absurd!
But that is what the government has been doing for about 15 years now.
Take a look at my recent post.
The Future
“Higher rates could add an additional $1.0 trillion to what the federal government spends on interest payments this decade, according to Peterson Foundation estimates.”
“That is on top of the record $8.1 trillion in debt costs that the Congressional Budget Office projected in May.”
It should be noted, that payments of interest on the federal debt could exceed government expenditures on national defense by 2029.
And, things do not stand still.
All this rush has come about since the Great Recession.
This is documented in another of my recent posts.
One eye-opening fact is that the national debt as a percentage of the Gross Domestic Product has gone from 60 percent in 2008 to more than 120 percent currently.
And, again, the justification given by many economists as well as politicians is,
“Well, interest rates are so low.”
Get real.
The Biden administration policies have added nearly $5.0 trillion to deficits since it took over Washington, D. C.
Some of the projections I have seen are really scary.
The talk about how this administration has brought down the deficit is all paperwork.
The deficits are going to increase in the near future. Interest costs are going up and no one really knows how far they will increase.
Then there are world affairs, Ukraine is not paid for, and what about the Chinese and Taiwan?
And, the deficits are going to increase just at the time the Federal Reserve is attempting to tighten up on monetary policy.
Seems like the government’s fiscal policy should be moving in the same direction that the government’s monetary policy is moving.
Good luck!
