QE Forever

Over at Turd Ferguson’s website, there is an interesting post up about interest rates and the size of deficits.

Specifically, current interest expense in the federal budget is about $350 billion, with an average rate of 2.2% and average duration of 5 years. Turd provides a great table that shows how interest expense has stayed relatively flat since the late ‘80s, even though total debt has gone up about five-fold. The secret has been to transition to and keep all of the debt short term (which makes it cheaper), while suppressing interest rates at the Fed. And it has been a fairly potent concoction – low interest rates, steady interest expense…and a few bubbles (but we digress).

Anyway, think through what happens if the Fed discontinues it program. Rates start to normalize – which historically speaking could mean something closer to 5%. Add to that, instead of $16 trillion in current debts, move out a few years when it’s projected to be $20 trillion. All of a sudden you’re talking about a trillion dollars a year, just in interest. Need I remind everyone that the current budget is only $3 trillion and the deficit is already $1 trillion. And foreign owners of treasuries have already become net sellers lately, so who’s going to pick up the slack? Because without someone to do it, you run into a major problem with funding the government. So who’s left?

I think we already know the answer.