Does the Debt Really Matter?
Post From KTFA by Memphis » March 26th, 2014, 8:44 am •
Does the debt really matter?
This post is an all important reminder and will lead us into some deeper discussions later today in subsequent posts. I hope that you are beginning to recognize there is NOT a shortage of evidence to support our discussions.
In this post I am bringing two blogs from yesterday one from sovereignman.com and the other, zerohedge.com
Simon Black does a good job of looking to history as a guide. I like that. With many rumors abounding that the USD will enter a state of hyper-inflation should we not check the history books to see what model is always followed by a developed nation that has not suffered a violent revolt?
Here's the problem that folks do not comprehend, 1st they ignore the reality that these cycles always complete. Men attempt to manipulate and delay (as we have seen for over 6yrs now) but ultimately their ignorance will be shown as things must then fall from an even greater height.
Also, in arguing for hyper-inflation, they are ASSUMING that our gov't will actually honor it's obligations and continue to issue more and more debt instruments and do not consider that we might just DEFAULT and tell our creditors.... "sorry".
What does history tell us...
Ultimately we come back to our studies of the past month, to AVOID such extreme scenarios from playing out might it not be better to re-structure the debt?
If our leaders were to stubbornly refuse these needed changes and plunge ahead down our present path, dragging the extreme weight of debt with every step, then (with history as our guide) I submit that the outcome is not one that anyone would desire.
I assure you that the world is tired of waiting on the US. We have a deadline folks. The IMF meets in 2 weeks and they have demanded....progress.....
Do you suppose our elected leaders have a clue? Do they know what's at stake here? We better hope the answer is a resounding yes and I submit that although many of them are ignorant of the true scope of the discussion (yes that should scare you) that the outcome is a pre-determined one.
I (we) see too much logical progression going on. There is a playbbok being followed so take a deep breath while all the theatrics play out and when the dust settles? You'll see that we were right and THEN our studies will begin to come into play! Blessings, Memphis
US now spending 26% of available tax revenue just to pay interest
March 25, 2014
Sovereign Valley Farm, Chile
By the 19th century, the Ottoman Empire had become a has-been power whose glory days as the world's superpower were well behind them.
They had been supplanted by the French, the British, and the Russian empires in all matters of economic, military, and diplomatic strength. Much of this was due to the Ottoman Empire's massive debt burden.
In 1868, the Ottoman government spent 17% of its entire tax revenue just to pay interest on the debt.
And they were well past the point of no return where they had to borrow money just to pay interest on the money they had already borrowed.
The increased debt meant the interest payments also increased. And three years later in 1871, the government was spending 32% of its tax revenue just to pay interest.
By 1877, the Ottoman government was spending 52% of its tax revenue just to pay interest. And at that point they were finished. They defaulted that year.
This is a common story throughout history.
The French government saw a meteoric rise in their debt throughout the late 1700s. By 1788, on the eve of the French Revolution, they spent 62% of their tax revenue to pay interest on the debt.
Charles I of Spain had so much debt that by 1559, interest payments exceeded ordinary revenue of the Habsburg monarchy. Spain defaulted four times on its debt before the end of the century.
It doesn't take a rocket scientist to figure out that an unsustainable debt burden soundly tolls the death knell of a nation's economy, and its government.
Unfortunately, it can sometimes take a rocket scientist to figure out what the real numbers are; governments have a vested interest in not being transparent about their debts and interest payments.
In the Land of the Free, for example, the government routinely doesn't count interest payments that they make to the Social Security Trust Fund.
They've managed to convince people that those debts don't matter 'because we owe it to ourselves.'
Apparently in their minds, solemn promises made to retirees simply don't count.
It's like a person who is in debt up to his eyeballs with both credit card companies and family members has no compunction about stiffing Grandpa.
Obligations are obligations, no matter who they're owed to.
Taking this into account, total US interest payments in Fiscal Year 2013 were a whopping $415 billion, roughly 17% of total tax revenue. Just like the Ottoman Empire was at in 1868.
Here's the thing, though-- it's inappropriate to look at total tax revenue when we're talking about making interest payments.
The IRS collected $2.49 trillion in taxes last year (net of refunds). But of this amount, $891 billion was from payroll tax.
According to FICA and the Social Security Act of 1935, however, this amount is tied directly to funding Social Security and Medicare. It is not to be used for interest payments.
Based on this data, the amount of tax revenue that the US government had available to pay for its operations was $1.599 trillion in FY2013.
This means they actually spent approximately 26% of their available tax revenue just to pay interest last year... a much higher number than 17%.
This is an unbelievable figure. The only thing more unbelievable is how masterfully they understate reality... and the level of deception they employ to conceal the truth.
Memphis note: An important marker to follow is rising interest rates. If rates simply rise to normal levels on the order of 7% it would take (at or near) 100% of our gov't revenue to simply pay the interest on the existing debt of our nation.
About six months ago Martin Armstrong made a bold statement saying that the Treasury had signaled the soon coming rise in interest rates. He based this on their announcement that bonds would be issued with a variable rate of return that would float based on market conditions. Right on cue, these bonds appeared in January.
This headline, also from yesterday, fits the discussion to a tee...
Treasury Sells 2 Year Paper At Highest Yield Since May 2011
Submitted by Tyler Durden on 03/25/2014 13:23 -0400
Moments ago the Treasury sold $32 billion in 2 year paper. Those who have been keeping track of the amazing bear flattening in rates in the past week will probably not be surprised by the result.
Everyone else will surely like to know that it just cost the US the most to sell 2 year paper since May of 2011, which at a high yield of 0.469% was the highest yield since May of 2012, or before the great rotation out of stocks and into bond began.
And thanks to the "dots" expect to see the yield on short-dated paper to continue rising, even as the long-end drops further in an epic flattening which is sure to crush bank Net Interest Margins. It also explains why nobody talks about it on CNBC any more: after all what is there to say?
Other notables of today's auction: the Indiect Bid of 40.93% was the highest since November 2012, offset by a tumble in the Dealer Takedown which at 37.53% was the lowest since October of 2012.
Perhaps the only good news was that despite the rising yields, or maybe due to, demand at the auction close was solid, with the high yield stopping though the When Issued of 0.477% by about 0.8 bps which was to be expected. If the Fed and Dealers lost control of the front end, it's all over.