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U.S. is robbing tech innovation programs to pay off debt to foreign creditors: Quinlan
22 October 2013, by Wallace Witkowski (MarketWatch)
U.S. is robbing tech innovation programs to pay off debt to foreign creditors: Quinlan - The Tell - MarketWatch
Its the classic dilemma of living on a credit card: the more you put on the card, the less money youre going to have to put toward the future because of interest payments.
Even as stocks rejoiced as U.S. lawmakers pushed the next government-funding and debt-ceiling battle into early 2014, the fact remains that the U.S. is still burning a significant amount of money paying off its credit card bill, money that was formerly put into the kind of research and development initiatives that helped secure its title as the worlds largest economy.
On a national level, U.S. borrowing from foreign creditors has reached a point where the cost of just servicing the debt far outpaces several areas where the government invests in the nations future, according to a recent note by Joseph Quinlan, chief market strategist at U.S. Trust, Bank of America Private Wealth Management.
The good news, Quinlan points out, is that the cost of servicing U.S. foreign debt declined about 23% to $127.7 billion a year by 2012 from a peak in 2008 (see chart above). The rub, however, is that much of that was due to the Federal Reserve slashing the federal funds rate over the course of 2008 from 3.50% to the current range of 0% to 0.25%.
Similarly, the yield on the 10-year Treasury note 10_YEAR -0.91% fell from 4.03% at the beginning of 2008 to 1.74% by the end of 2012, and is currently at 2.52%. With the Fed expected to start raising rates from near-zero sometime in 2015, the debt-servicing cost will likely balloon as a result. In fact, Societe Generale has said the Fed could boost the rate as high as 6% by 2017.
Even at $127.7 billion a year in interest payments, Quinlan fears were robbing the future to pay for the past as were doling out much more in interest to foreign lenders than were investing in any one program that has traditionally spurred U.S. innovation.
Citing figures from University of Sussex economist Mariana Mazzucato, Quinlan points out that 88% of U.S.-led technological innovations between 1971 and 2006 were fully dependent on federal research support, especially in their early phases.
Also, government investment in research and development is right around levels the U.S. is paying on interest to foreign lenders (see chart below). Then again, the amount its paying in interest is always subject to a spike if Treasury yields go higher.
Quinlan writes:
Looking ahead, the risk is that these programs, under present circumstances, will become underfunded in part due to Americas outsized interest payments to its foreign creditors. After we pay our creditors, how much capital is left over to fund the future activities that make up the foundation of the U.S. economy?
Against this backdrop, think of rising interest payments to foreigners as having a crowding out effect on other government programs and services. The former has become a significant line item of the U.S. budget. And if and when U.S. interest rates back up, the cost of servicing this debt will only rise.
Given all this, Quinlan said hes still constructive on U.S. equities, placing faith in a dynamic private sector while being mindful of the dysfunctional state of Washington, D.C..
22 October 2013, by Wallace Witkowski (MarketWatch)
U.S. is robbing tech innovation programs to pay off debt to foreign creditors: Quinlan - The Tell - MarketWatch
Its the classic dilemma of living on a credit card: the more you put on the card, the less money youre going to have to put toward the future because of interest payments.
Even as stocks rejoiced as U.S. lawmakers pushed the next government-funding and debt-ceiling battle into early 2014, the fact remains that the U.S. is still burning a significant amount of money paying off its credit card bill, money that was formerly put into the kind of research and development initiatives that helped secure its title as the worlds largest economy.
On a national level, U.S. borrowing from foreign creditors has reached a point where the cost of just servicing the debt far outpaces several areas where the government invests in the nations future, according to a recent note by Joseph Quinlan, chief market strategist at U.S. Trust, Bank of America Private Wealth Management.
The good news, Quinlan points out, is that the cost of servicing U.S. foreign debt declined about 23% to $127.7 billion a year by 2012 from a peak in 2008 (see chart above). The rub, however, is that much of that was due to the Federal Reserve slashing the federal funds rate over the course of 2008 from 3.50% to the current range of 0% to 0.25%.
Similarly, the yield on the 10-year Treasury note 10_YEAR -0.91% fell from 4.03% at the beginning of 2008 to 1.74% by the end of 2012, and is currently at 2.52%. With the Fed expected to start raising rates from near-zero sometime in 2015, the debt-servicing cost will likely balloon as a result. In fact, Societe Generale has said the Fed could boost the rate as high as 6% by 2017.
Even at $127.7 billion a year in interest payments, Quinlan fears were robbing the future to pay for the past as were doling out much more in interest to foreign lenders than were investing in any one program that has traditionally spurred U.S. innovation.
Citing figures from University of Sussex economist Mariana Mazzucato, Quinlan points out that 88% of U.S.-led technological innovations between 1971 and 2006 were fully dependent on federal research support, especially in their early phases.
Also, government investment in research and development is right around levels the U.S. is paying on interest to foreign lenders (see chart below). Then again, the amount its paying in interest is always subject to a spike if Treasury yields go higher.
Quinlan writes:
Looking ahead, the risk is that these programs, under present circumstances, will become underfunded in part due to Americas outsized interest payments to its foreign creditors. After we pay our creditors, how much capital is left over to fund the future activities that make up the foundation of the U.S. economy?
Against this backdrop, think of rising interest payments to foreigners as having a crowding out effect on other government programs and services. The former has become a significant line item of the U.S. budget. And if and when U.S. interest rates back up, the cost of servicing this debt will only rise.
Given all this, Quinlan said hes still constructive on U.S. equities, placing faith in a dynamic private sector while being mindful of the dysfunctional state of Washington, D.C..
