Federal Spending Is Beyond Insane

[iamwhatiseem]

During his State of the Union address on Tuesday, Biden made the following statement:

By the end of this year, the deficit will be down to less than half what it was before I took office.

The only president ever to cut the deficit by more than one trillion dollars in a single year.

That sounds great..until you realize the fricking deficit is still in the stratosphere.

The federal deficit skyrocketed to $3.132 trillion in Trump's last year in office. So even if Biden got the deficit down to half that amount, it would still be $1.5 trillion!

Not even in Obama's worst year was it that high.

]

I really don't see anything for Biden to brag about.

I realize it will take time to reduce the deficit down to what Trump inherited when he took office. Trump inherited a half trillion dollar deficit and set about doubling that in his first two years when he and the GOP had full control.

If Biden is able to achieve getting the deficit down to half a trillion in four years, then I will be impressed. Though it took Obama eight years to go from one trillion to half a trillion. Biden has a much bigger mountain to climb.

Sources for this topic:

Remarks of President Joe Biden – State of the Union Address As Prepared for Delivery | The White House

United States Capitol Madam Speaker, Madam Vice President, our First Lady and Second Gentleman. Members of Congress and the Cabinet. Justices of the Supreme Court. My fellow Americans. Last year COVID-19 kept us apart. This year we are finally together again. Tonight, we meet as Democrats...

www.whitehouse.gov

Fiscal Data Explains the National Deficit

Check out @FiscalService Fiscal Data’s new national deficit page! #NationalDeficit

datalab.usaspending.gov

US Budget Deficit by Year Compared to GDP, Debt, and Events

The federal budget deficit rises when government spending is high, such as during wars or recessions. Budget deficits cause the national debt to grow.

www.thebalance.com

Telling.
And what is telling is that the media coverage on this doesn't mention that a decrease of half would still be the highest ever due to Covid gross spending.

 

[Lesh]

Every time a bill, note or bond matures, we pay the principal.

And then issue a new one to cover that. We pay only the interest

 

[Toddsterpatriot]

And then issue a new one to cover that.

Issue? What do you mean?

 

[para bellum]

Every time a bill, note or bond matures, we pay the principal.

Yes, but the money to pay off the mature debt comes from issuing new debt. The debt just rolls over into the new bond or T-Bill.

If (when) interest rates return to their post-war ~5% range, servicing a $30Tn debt consumes $1.5 Tn/yr. That will definitely squeeze out other spending.

 

[Lesh]

Issue? What do you mean?

Dude...this is obviously beyond you

 

[Lesh]

Yes, but the money to pay off the mature debt comes from issuing new debt. The debt just rolls over into the new bond or T-Bill.

If (when) interest rates return to their post-war ~5% range, servicing a $30Tn debt consumes $1.5 Tn/yr. That will definitely squeeze out other spending.

The Fed was at 5%?

No...it was not

 

[para bellum]

Issue? What do you mean?

Lesh beat me to the post. The treasury raises capital by issuing bonds, which they sell at auction.

 

[para bellum]

The Fed was at 5%?

No...it was not

The Fed? As in the Federal Reserve? Are you talking about the target rate?

That has been as high as 20%, back in 1980, and 5% is low by historical measures. It's 0.25% right now, with a 25 basis point increase slated for this month, which will bring it up to 0.5%..

Fed Funds Rate History: Its Highs, Lows, and Charts

The fed funds rate has ranged anywhere from 0% to as high as 20% since 1971. Learn about the highs and lows as well as the events that have impacted it over time.

www.thebalance.com

Servicing the debt is not based on Fed funds rates, it's based on treasury rates.

The post-war average of 10 year treasuries is 4.29%, and for 30-year bonds it's 6.49%. About triple the current rate.

That's what we pay to service our debt, it has nothing to do with Fed target lending rates. The Fed can't even buy treasuries direct, they have to go through a primary dealer like Chase or BONY-Mellon. The interest on treasuries is whatever the lenders think they are worth. If the yield is too low, there just won't be any takers.

Likewise with the Fed. They can raise the target rate, but that doesn't guarantee the banks will want to borrow.

The Fed has been holding the treasury rates down by guaranteeing the repo rate exceeds the yield. A primary dealer knows they can purchase Treasuries and walk across the street and plop them down on a repo with no risk. That's why the banks don't pay interest on savings- they can get money for free from the Fed.

They get the same treatment on excess capital- the interest rate the Fed pays the bank is higher the target rate, so a bank can borrow at the target rate, deposit into their excess reserves, and make a profit even though the capital never leaves the canyons of Wall Street.

Been this way since 2008. This is a massive intervention in the cost of capital, and it causes a misallocation of capital away from productive purposes and into financial instruments that do nothing for creating wealth.

 

[Brain357]

Which is why it won't be done even though the deficit continues to grow.

Sadly you may be right.

 

[Brain357]

I agree, but to me it's more a pox on both parties, literally. Although if Trump were dead and buried and not a candidate or in the news, I might actually be defending the gop. I've had a sort of "mini-epiphany here" in expectation of Easter, maybe.

But Cheney said "deficits don't matter, Reagan taught us that." I've been pissed at that comment for years, but Trump and the Progressives have taught me what maybe Cheney got right. For over 30 years we wondered where inflation had gone. And surprisingly to me, we had supply side tax cuts where the very rich got windfalls, and we workers got a little

Historical Average Federal Tax Rates for All Households

Average federal tax rates for all households, by comprehensive household income quintile.

www.taxpolicycenter.org

deficits went up, but no so much in terms of debt/gnp% ...... until Both of the Bush'es recessions.

Debt to GDP Ratio Historical Chart

Each time a D got elected - Slick then Obama - deficits either actually went down or at least stabilized. And we had growth too, btw.

But we didn't have inflation even while the GOP was "hitting it out of the park."

But then came the progressives for the first time since 1980. We had to "give money to the people" (Bernie accent)

So much for paying for social security medicare and obamacare. WE gotta give people money!

And we actually experienced decent growth for once. Too much for the supply chain so we have some inflation. It will go away soon enough. It is clear an economy slows down when everything goes to the wealthy.

 

[Lesh]

Interest on the National Debt and How It Affects You

The interest on the national debt is how much the federal government pays on the outstanding public debt. Learn how it's calculated and what it means for you.

www.thebalance.com

Interest on the debt cost 303 Billion in 2021.

We spent well over twice that on Defense.

The National Debt is NOT a huge issue

 

[Toddsterpatriot]

Dude...this is obviously beyond you

They have to sell new debt?
What if people are reluctant to buy the new debt, because you're spending too much?

 

[Toddsterpatriot]

Lesh beat me to the post. The treasury raises capital by issuing bonds, which they sell at auction.

So we're not "just paying the interest"?
Thanks.

 

[Toddsterpatriot]

That's why the banks don't pay interest on savings- they can get money for free from the Fed.

For free?

They get the same treatment on excess capital- the interest rate the Fed pays the bank is higher the target rate, so a bank can borrow at the target rate, deposit into their excess reserves, and make a profit even though the capital never leaves the canyons of Wall Street.

Sounds awful! What's the target rate? What do they get paid on reserves?
How much are the banks borrowing to do that arbitrage?

 

[para bellum]

So we're not "just paying the interest"?
Thanks.

Right, we're not "just paying interest". We're paying interest and borrowing more. We still have to pay interest even if we stop borrowing more- e.g. we "balance the budget". The balanced budget must include the interest on the debt outstanding, so the interest rate that the Treasury pays impacts the ability to balance the budget.

We are issuing several trillion in new debt every year. We will have to pay the interest on that until it matures. To do that, we will issue new debt at whatever is the current rate, and we will pay that rate for the duration. The old debt is replaced by new debt, at the interest rates of the new debt.

The longer we do that, the greater the risk interest rates pose to the budget. Right now it's under 2% and we will pay about ~$380 Bn interest this year. What happens when that goes back up to 5%? The budget impact of a $30 Tn debt goes from ~$400 Bn to ~$1.5 Tn.

5% is not an outlandish figure. It is very consistent with historical interest rates when the economy is running well. That one change alone, would put a trillion dollar hole in the budget.

 

[para bellum]

For free?

They get the same treatment on excess capital- the interest rate the Fed pays the bank is higher the target rate, so a bank can borrow at the target rate, deposit into their excess reserves, and make a profit even though the capital never leaves the canyons of Wall Street.

Sounds awful! What's the target rate? What do they get paid on reserves?
How much are the banks borrowing to do that arbitrage?

The Fed funds rate is 0.25%. The banks get at least 0.5% on their excess reserves. The money never leaves the NY Fed- it's just a computer entry, one account to another. It's there if the banks get into another jam. Part of Dodd-Frank capital reserve requirements.

It's how the banks pass the "stress tests". This is the big banks I'm talking about, the ones with access to the discount window and reserve accounts at the Fed. There has been an expansion of this access to smaller banks, but "smaller" in that context still means a large regional bank.

edit to add: The real arbitrage goes on in the repo markets- that is off the books, and really crazy. That's what triggered the financial crisis in 2008- repo fails on mortgage-backed securities when the clearing banks refused to roll them over. Interbank credit froze.

 

[Fort Fun Indiana]

I refuse to believe that $4 trillion in federal tax revenue is not enough to run this country.

So what? That is meaningless. Your gut feelings are useless on this.

Smart people look at data, like expenditures as a percentage of GDP.

 

[Toddsterpatriot]

The Fed funds rate is 0.25%. The banks get at least 0.5% on their excess reserves. The money never leaves the NY Fed- it's just a computer entry, one account to another. It's there if the banks get into another jam. Part of Dodd-Frank capital reserve requirements.

It's how the banks pass the "stress tests". This is the big banks I'm talking about, the ones with access to the discount window and reserve accounts at the Fed. There has been an expansion of this access to smaller banks, but "smaller" in that context still means a large regional bank.

edit to add: The real arbitrage goes on in the repo markets- that is off the books, and really crazy. That's what triggered the financial crisis in 2008- repo fails on mortgage-backed securities when the clearing banks refused to roll them over. Interbank credit froze.

The Fed funds rate is 0.25%. The banks get at least 0.5% on their excess reserves.

Banks aren't borrowing from the Fed at the Fed Funds Rate.
They don't get at least 0.5% on reserves. And leave off the word "excess".

The real arbitrage goes on in the repo markets- that is off the books, and really crazy.

Fed repos and reverse repos aren't "off the books".

 

[para bellum]

The Fed funds rate is 0.25%. The banks get at least 0.5% on their excess reserves.

Banks aren't borrowing from the Fed at the Fed Funds Rate.

They are if they are large enough to qualify for primary credit.

Discount Window Primary Credit Rate

Graph and download economic data for Discount Window Primary Credit Rate (DPCREDIT) from 2003-01-09 to 2024-01-25 about primary, credits, interest rate, interest, rate, and USA.

fred.stlouisfed.org

They don't get at least 0.5% on reserves. And leave off the word "excess".

Excess reserves are distinct from normal capital reserves under Dodd-Frank and before. What used to be called the IOER rate is now called the IORB rate. Part of QE was to do what I described- pay a higher IOER rate than the Fed Funds rate.

I typed that without looking up current rates, so I stand corrected on that point. The Fed is not currently paying a higher IORB rate than the Discount credit rate- it's ten basis points below. That hasn't always been the case.

Interest Rate on Excess Reserves (DISCONTINUED)

Graph and download economic data for Interest Rate on Excess Reserves (DISCONTINUED) (IOER) from 2008-10-09 to 2021-07-28 about IOER, reserves, interest rate, interest, rate, and USA.

fred.stlouisfed.org

The real arbitrage goes on in the repo markets- that is off the books, and really crazy.

Fed repos and reverse repos aren't "off the books".

They are not on the balance sheets because they are cleared every morning. The only effect is the interest earned or paid on the repo and cash on hand. That is per the Financial Inquiry Commission, take it or leave it.

The Fed uses the repo rate to control the money supply by setting how much they will lend on securities. If the repo rate is low, it incentivizes the banks to exchange their securities for cash, raising it does the opposite.

What the banks do on the repo markets is much more opaque. We have no way of knowing if they are say, using capital reserves as collateral in securities that are then borrowed against on the repo markets. In effect, it would be using reserve capital as liquidity, which is something we don't (in theory) want them to be doing.

 

[Toddsterpatriot]

They are if they are large enough to qualify for primary credit.

Discount Window Primary Credit Rate

Graph and download economic data for Discount Window Primary Credit Rate (DPCREDIT) from 2003-01-09 to 2024-01-25 about primary, credits, interest rate, interest, rate, and USA.

fred.stlouisfed.org

Excess reserves are distinct from normal capital reserves under Dodd-Frank and before. What used to be called the IOER rate is now called the IORB rate. Part of QE was to do what I described- pay a higher IOER rate than the Fed Funds rate.

I typed that without looking up current rates, so I stand corrected on that point. The Fed is not currently paying a higher IORB rate than the Discount credit rate- it's ten basis points below. That hasn't always been the case.

Interest Rate on Excess Reserves (DISCONTINUED)

Graph and download economic data for Interest Rate on Excess Reserves (DISCONTINUED) (IOER) from 2008-10-09 to 2021-07-28 about IOER, reserves, interest rate, interest, rate, and USA.

fred.stlouisfed.org

They are not on the balance sheets because they are cleared every morning. The only effect is the interest earned or paid on the repo and cash on hand. That is per the Financial Inquiry Commission, take it or leave it.

The Fed uses the repo rate to control the money supply by setting how much they will lend on securities. If the repo rate is low, it incentivizes the banks to exchange their securities for cash, raising it does the opposite.

What the banks do on the repo markets is much more opaque. We have no way of knowing if they are say, using capital reserves as collateral in securities that are then borrowed against on the repo markets. In effect, it would be using reserve capital as liquidity, which is something we don't (in theory) want them to be doing.

They are if they are large enough to qualify for primary credit.

Primary credit isn't Fed Funds.

Part of QE was to do what I described- pay a higher IOER rate than the Fed Funds rate.

You said banks could borrow from the Fed and earn more on the increased reserves. They can't.

The Fed is not currently paying a higher IORB rate than the Discount credit rate- it's ten basis points below. That hasn't always been the case.

When has IORB been higher than the Discount rate?