Stearns County, Minnesota | OldMcdonald - 11/21/2013 11:41 Well facts are facts... and the fact is that there hasn't been a time in the 237 year history of the USA that a central bank has outright monetized the entire US gov't deficit in a year. The fact that it hasn't happend before, and is happening now, by virtue of that reality, means it is different right? "What does it matter how much it 'costs' the govt to service the debt? The FED is buying it from money created from thin air? What would it matter if instead of 500 billion interest or 5 trillion? If the FED is willing to purchase the debt it won't matter." This is where I wholly disagree with you. It matters very much, I assure you, how much it costs a gov't to service it's debt. IMO, You kind of have the horse before the cart in your argument. It matters enough that the FED is willing to put up a trillion anually on their balance sheet just to keep the rates low, right? There is point where it is percieved by bondholders of gov't, businesses, consumers, anyone - that if your borrowing costs are too high, they don't want to hold your debt anymore. Guess what they do? You really think bondholers are going to sit on their treasuries and watch as interest costs surpass the revenue the gov't can even generate? would you sit on your US bonds? or would you be calling your broker? I think people really arn't grasping the severity of the situation. There are 17 trillion in notes outstanding. The fed is buying 700 billlion of them, and about 6-700 of those are new issues. So by and large, the rest of the market is supporting any other sales. If the FED raises the rates such that interest is a large percentage of the budget (or all - 5 trillion or whatever number you like), they are going to be buying ALL of the bonds, all 17 trillion. At once, or in very short order. Not just the gov'ts new issues. Not just 1 or 2 a year. No one is going to hold their US bonds when interest costs eclipse tax revenue.
Living and being in business in the 70's and 80's, this is what I remember. The inflation of land and commodities, started in 1972, with the Great Grain Robbery by the Soviet Union. Before that corn was $1.25 and by 1974 it went up to $4.50 a bushel. Land and machinery prices shot up because of demand. By 1978-79, agriculture was in an inflationary spiral, where machinery and land were jumping 12-15% a year. Young farmers were borrowing all they could, because each year their net worth was inflating. At that time banks lent money on net worth and not on cash flow. The land loans were 6-7% and operating loans were 8-9%. These were all fixed loans; the variable loan came into being after the Federal Reserve allowed them in the mid 80's. The usury laws were in effect which allowed banks to charge so much over the Federal Rates. Everyone felt that interest rates would not be going up because the Feds would destroy the banking industry with higher rates. Most long term loans were made at a fixed rate, and the banks would be paying more for funds than they could recover from long term loans. This could destroy the viability of the banks. This all changed in late 1979, when the Feds decided to raise the discount rate to 19%, and bank loans to customers went to 22% within a 15 month period. This was done to stop inflation.
What was the result of this? First of all there was a full blown farm crisis by 1985, secondly adjustable interest on loans came into being, third, bank regulations changed which allowed banks to close out farmers, take the loss, and put the losses on the bank books, as an asset for 20 years. Fourth, banks started making loans on cash flow, instead of net worth.
My opinion is, if inflation starts getting too high, the Federal Reserve will raise interest rates regardless what it will do to the national debt. I don't think they will have any other choice.
http://dailyreckoning.com/the-great-grain-robbery/
Edited by 99MAX 11/21/2013 14:11
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It IS Different this Time.
