The headline in the Wall Street Journal on July 25 was telling: "A Windfall as Yields Drop." The article details how various governments have reduced their expenditures by paying out far less in interest on their debt. The British government alone reduced interest payments on their debt by 35 percent in 2015 compared to 2013. Spain and Germany are selling bonds with a negative yield, meaning that lenders to these governments are actually paying to have their money held. U.K. Treasury chief Phillip Hammond told the Wall Street Journal: "Borrowing, when the cost of money is cheap has some great attractions."
In the United States, according to the article, "the drop in government borrowing costs have helped push the budget deficit down to less than 3 percent of GDP."
New car sales have been off the charts the past few years (although 35 percent of those "sales" are actually leases at virtually no interest). Want new furniture? Buy at 0 interest with five years to pay, at most furniture stores. New home rates are at an all-time low of 3.5 percent or lower.
The stock market is at an all-time high, driven by low interest rates. Businesses and those who can't afford to gamble in the markets, such as senior citizens, have invested in stocks anyway, as there is no place to get a return on investment in safe securities. Annuities are paying 0.5 percent, and most savings accounts are less than 1 percent. Maybe if an investor wants to tie money up in a CD for five years, he can manage a return of just under 2.5 percent.
Let the good times roll on borrowed money. There is no downside, right?
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Ah … except that seniors who saved all their lives to retire are now on food stamps.
Financial aid to the "poor" is not based on assets; it is based on income. Right now even a well-to-do retired widow with $500,000 in the bank who owns her own home would qualify for food stamps, based on her income from savings of 1.5 percent – or $7,500 a year. Add that to her $12,000 a year Social Security check, and she has to choose between food, medical care or power for her home. In 2007, even at low CD rates, she would have had an investment income of around $20,000 a year and in the year 2000 around $25,000 a year.
Historically, interest rates have been about 1.5 to 2 percent above inflation. But with the Federal Reserve keeping interest rates at near zero yield, interest paid has nothing to do with inflation or the supply of money. The Federal Reserve has distorted the process to stimulate growth, or at least that is the claim. The reality is different. The Federal Reserve and other central banks are saving Western governments, including that of the United States, from total economic collapse under the weight of unbearable debt – at least for a while – by greatly reducing debt payment.
The current national debt is about $19 trillion. If interest rates on the debt were raised to 6 percent – which would be reasonable – the national debt would balloon to $94 trillion by 2036, according to Daniel R. Amerman, CFA.
While that 6 percent interest rate would allow those who do not have government pensions to retire on savings, it would increase the per-family share of the national debt to as much as $700,000. Just to pay the debt service would require most current functions of government to be shut down – except for tax collection.
The prosperity of Western governments and the economies they support is a fantasy, sort of a "The Emperor's New Clothes" children's tale, and we are still in the first part of the fantasy, where no one has as yet screamed out, "The emperor has no clothes!"
Virtually all the consumption in Western economies is from borrowed money – cars, homes, appliances and food … even the food purchased with food stamps. At the check-out counter, the guy buying the steaks with the state issued EBT Card is using funds the government borrowed to give to him.
Money is so cheap, huge corporations that don't need money still borrow. In 2015, Apple borrowed $40 billion even though the company had $216 billion on hand that it did not know exactly how to spend. People do this as well, but often times borrowing far beyond their means of paying back because of low monthly payments due to low interest rates.
Problem: The collective debt of governments, businesses and individuals is so high it simply can never be paid down. No amount of growth, Mr. Trump, nor amount of taxation, Secretary Clinton, can ever pay back the staggering debt of the United States that does not currently even include future pensions, Social Security, Medicare, Medicaid and other increasing obligations.
Sen. Bernie Sanders had one solution that will not work – socialism. That was tried in Venezuela. Now, the debt is higher and the people are starving there, while the private sector is shut down store by store and factory by factory. Hillary Clinton's plan for crony capitalism that funds government with huge blackmail demands from Wall Street banks will not work either.
Real money is produced only by mining, farming, manufacturing and added services. Wealth and real money are created by adding value to something that had little or no value, and this is done by means of labor and capital – as with building a car from raw materials, or cutting hair all week with a $20 pair of clippers. Wealth cannot be created by simply handing people plastic cards.
Waiting for my solution? Don't hold your breath. The solution to this kind of financial insanity is the same as it has always been – collapse. The great crash of 1340 comes to mind, or the Banque Royale collapse in the early 18th century after France's first experiment with legal tender paper currency. Eventually, materials and labor have to produce real money to replace the worthless paper and plastic. The question really becomes then, can we somehow keep the good times rolling until we die and hand off the problem to our grandchildren or great grandchildren?