There is much talk of the quantitative easing (QE) program and it’s eventual unwinding, but it’s what happens after interest rates return to normal that has many people on edge. The unprecedented debt being rung up under President Obama and congress is quietly putting the U.S. behind the eight ball. The numbers look relatively manageable at the moment, but that is simply a function of low rates. Once rates return to more usual levels the issue will undoubtedly be front and center once again. Of course, many people are well aware of this upcoming problem and are dutifully concerned and it’s probable some of those people are at the Fed. There is some speculation going on that the Fed is so concerned about this that they have delayed any so-called tapering for a while:
I believe that one of the most important reasons the Fed is determined to keep interest rates low is one that is rarely talked about, and which comprises a dark economic foreboding that should frighten us all.
That is pure speculation, of course, but it does make a bit of intuitive sense. After all, the U.S. debt is near $17 trillion and seemingly not going lower anytime soon. If interest rates rise, many of those Notes, Bills, and Bonds will have to be rolled over into higher yielding paper. What does that mean to the taxpayer? Well, it’s not good:
Do the math: If we were to pay an average interest rate on our debt of 5.7 percent, rather than the 2.4 percent we pay today, in 2020 our debt service cost will be about $930 billion.
Now compare that to the amount the Internal Revenue Service collects from us in personal income taxes.
In 2012, that amount was $1.1 trillion, meaning that if interest rates went back to a more normal level of, say, 5.7 percent, 85 percent of all personal income taxes collected would go to servicing the debt. No wonder the Fed is worried.
How’s that for some sobering numbers? I encourage you to read the whole thing, as they say, as it is very interesting. But, I am not really sure that I agree with his conclusion. Yes, there can be no doubt that the Fed is more than aware of this situation. But they have to be equally concerned that their QE programs are racking up some hefty numbers all on their own. Further, the economy is not getting any better (or at least hardly any better) even after five years of this stuff, and any “tapering” has to be worrying them as well. In short the Fed is between the proverbial rock and a hard place and they know it. Ultimately, investors have to be concerned with the massive debt itself and what that might do to the future of the U.S. But the Fed has so much on it’s plate as it is, that worrying about how a few billion dollars of tapering will effect the debt service abilities of the country after rates go above 5% is probably low on their list. Really though, that is just splitting hairs. The issue is grave indeed. All of the Washington chatter seems to flit from one issue to another, but never that debt elephant in the room. Until there is real growth, cutting any of this debt down is nothing but a dream, and even then it will take discipline — not something Washington is known for. In the meantime, it is important for investors to keep tabs on the issue and, as always, make sure that your portfolio is prepared for all circumstances.