“The Fed Just Shocked Investors” – Really!?
Around the world, you can read about the surprising move by Ben Shalom Bernanke and the Federal Reserve. Big Ben decided to not taper, i.e. to not cut back on the ongoing buying of bonds, and instead continue with the existing buying plan.
Here is one famous and well-informed gentleman telling us about it:
But how on earth can this be a surprise? After all, just have a look at the basic facts. The US government is spending an estimated $6.4 trillion this year, whereof $336.5 million is on interest on the $20,228.2 trillion it already owes. At the same time, it is collecting $5.4 trillion in tax revenue. So it has to borrow about $1 trillion this year.
Hence, the government is clearly borrowing money to pay for the interest, since there would be a deficit even without the interest payments. They have to borrow more money just to be able to pay interest on what they already owe.
If this was my situation, who would lend me money?
Yearly income: $54,000
Yearly spending: $64,000
– Whereof on interest: $ 3,365
Total debt: $202,282
Loan application for this year: $10,000
Would you lend me more money? I suppose you would be worried to get your money back, right?
So who lends the US government this money? As far as I can tell, the general public and the foreign lenders have pretty much stopped lending, or are covering only a minor part of the money.
So who is lending the rest?
Yes, the Fed. This year, they have even been buying more US debt than was issued. And what would happen if they would stop buying the debt?
Well, the US government would have to tell its creditors that there is no money to pay the interest, much less pay back the principals. This is called a default. The US government would default (it would not be the first time, though).
Do you think the US government and the people in charge right now want this to happen, and to happen now, on their shift? What about the people at the Fed or Big Ben himself, who is about to retire soon?
We are way beyond the point where they can taper. We are way beyond the point where the US will be able to handle its addiction to debt. We are way beyond the point where this will have a happy ending. All we can expect is that the Fed and the US government will do their best to postpone the problems.
So how could this possibly be a surprise? If investors were shocked by this, then so be it. Maybe they need to invest in some fans to blow away some smoke screens. But I guess it must take some special skills to see the smoke screens to begin with.
The figures on the spending, revenue and deficit are estimates found at:
It doesn’t matter if the estimates are completely correct, the conclusions are still the same. On buying more debt than issued, see: