Debt | timiacono.com - Part 5

Why Interest Rates Can Never Rise

Among many other interesting projections in the latest budget outlook from the Congressional Budget Office comes this look at the cost of servicing the U.S. debt that is expected to top the $21 trillion mark at the end of the 10-year budget window.

Here’s what the CBO projects that curve to look like via this story at CNN/Money.

Interest on the debt

The current year budget deficit was reported the other day at somewhere around $500 billion, with interest on the debt accounting for less than half that total.

For obvious reasons, the CBO deems the situation above to be unsustainable, however, it becomes much less unsustainable if interest rates remain at or near their current low levels, rather than rising steadily over this period as the group projects.

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A couple of CNBC videos shed some light on the recent market rout. First, Art Cashin, UBS’ director of floor operations at the NYSE, cites the combination of recently weak economic data in both the U.S. and the world along with some key technical factors.

Gloom, Boom & Doom author Marc Faber offers up a much more interesting explanation for what’s going on, namely, that “a vicious circle on the downside” is now underway as assets that were artificially inflated via central bank largess become less inflated.

Faber goes on to note, “Total credit as a percent of the global economy is now 30 percent higher than it was at the start of the economic crisis in 2007…”

Ben Bernanke’s Legacy

This beautiful song, written and performed by Elaine Diane Taylor, chronicles some of Ben Bernanke’s accomplishments over the last eight years.

It will take some time to judge the Bernanke term at the Fed. Given the sequence of events for the last Fed Chair transition, analysts are understandably cautious about giving him a big thumbs-up at this point. Recall that, after the Greenspan term at the Fed ended in January 2006, it took a year of two for the policies enacted during that time to really flower.

Meltzer on Bernanke

In this story at Reuters, Federal Reserve historian Allan Melzer shares a few thoughts on what lies ahead for incoming Fed Chair Janet Yellen following tomorrow’s departure of current Fed Chairman Ben Bernanke. One thing seems clear, as was the case for Alan Greenspan, we won’t know the full impact of Bernanke’s policies for years to come.

To Allan Meltzer, a leading Fed historian, no outcome looks good for Bernanke. “If they go too fast, we’re going to get a recession. If they go too slowly, we are going to get serious inflation. If they do neither, we could get both,” he said.

The first round of quantitative easing in 2008 and 2009 was heroic, Meltzer said. But the second and third rounds were “just a mistake, a serious mistake, that will have problems.”

“History will judge his response to the 2009 crisis very well,” he said of Bernanke. “They will judge the aftermath as being much too strong and unnecessary.”

Another thing that seems clear is that the image above will be an enduring one.

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