These are the good old days

With all the news about Japan and Libya this past week, you are probably unaware that on Thursday, March 17, the US Domestic Monetary Policy and Technology Subcommittee held hearings to examine the relationship between monetary policy and rising prices.

Chaired by staunch US Federal Reserve critic Ron Paul, the subcommittee heard testimony from witnesses Joseph T. Salerno (Professor, Pace University), James Grant (Editor, Grant’s Interest Rate Observer) and Lewis E. Lehrman (Senior Partner, L.E. Lehrman & Co).

And although the hearings were boycotted by House Democrats, there was some important testimony by James Grant that's worth noting.

The bespectacled and bow tied editor of Grant’s Interest Rate Observer had a sobering message for Washington lawmakers:

“These are the good old days with respect to interest costs.”

It's a theme this blog has harped on for the last 18 months. And Grant laid it out very clearly.

For every $1 that the US Government spends today, they currently borrow 43 cents.

What happens when bond traders start to get spooked about America's ability to pay it back?

Interest rates will rise. Plain and simple.

And bond traders today don't even have to get spooked to a fraction of the level that they were in the early 1980s when then-Federal Reserve chairman Paul Volcker had to raise interest rates all the way up to 18%.

If interest rates merely regress to the historic mean, "debt service nearly doubles," chimed in investment banker Lewis Lehrman.

Using projections released by the Treasury Borrowing Advisory Committee on Feb. 1, 2011, rates on the 10-year Treasury note need only rise from today's 3.27% to 5.3% before the debt service figure jumps from today's $413 billion to $800 billion by 2020.

"All of the talk about cutting a hundred billion" this spring would be for naught, says Lehrman. That $100 billion would be consumed four times over just to pay off interest on the debt. (For the record, the $100 billion in question was already debated down to $67 billion on the House floor.)

But where to cut?

With tax revenue running at roughly $2 trillion a year, 40% of the budget would be going to debt service. A rise of 2% in interest rates and America would be even broker than it already is... instantly.

When you look at the numbers there is an inescapable crisis looming on the immediate horizon. A crisis which is going to lead to a dramatic loss of confidence in the US dollar, a crisis which will cause bond traders to force interest rates much higher.

The warning signs are there for anyone who wants to see them.

Get out of debt NOW and position yourself to take advantage of investments that will soar as this plays out.

It really is a no-brainer.

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Email: village_whisperer@live.ca

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