Wednesday, September 25, 2013

The Fed's Hidden Agenda?

Peter J. Tanous writes, at CNBC, regarding his theory on why the Federal Reserve has continued with quantitative easing, even though the Fed has already bought up $3.6 trillion of U.S. Treasury bonds.  I figured that it was something mundane like keeping the financial markets artificially inflated, but he thinks it may have something to do with maintaining social order. He writes:

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. 
Let me start with a question: How would you feel if you knew that almost all of the money you pay in personal income tax went to pay just one bill, the interest on the debt? Chances are, you and millions of Americans would find that completely unacceptable and indeed they should. 
But that is where we may be heading. 
Thanks to the Fed, the interest rate paid on our national debt is at an historic low of 2.4 percent, according to the Congressional Budget Office. 
Given the U.S.'s huge accumulated deficit, this low interest rate is important to keep debt servicing costs down.

Tanous then notes that the average bond rates during the last 20 years was 5.7%, and in 2020, it is estimated that government debt will $16.6 trillion. At 5.7%, the cost of servicing the debt in 2020 would be $930 billion--85% of the $1.1 trillion that the Federal government collected in personal income tax last year. He also notes that many economists believe that quantitative easing will lead to inflation, which will cause interest rates on T-bills to go even higher.

One thing is clear: Based on CBO projections, if interest rates just rise to their 20-year average, we will have an untenable, unacceptable interest rate bill whose beneficiaries are China, Japan, and others who own our bonds. 
And if Americans find out that the lion's share of their income tax payments are going to service the debt, prepare for a new American revolution. 

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