The further to the left or the right you move, the more your lens on life distorts.

Wednesday, September 25, 2013

What? Me Worry?

According to virtually everyone on the Left, a significant majority of all democrats, left-wing economists like Paul Krugman and Robert Reich, President Obama and his trained hamsters in the media, massive federal spending and the resulting deficits are the only things that will bolster our economy, gargantuan public debt is acceptable and generally irrelevant, and quantitative easing (in effect the Federal Reserve 'printing money' to buy our debt)is nothing to worry about.


This is, of course, one of the Left's many fantasy arguments, and it will crumble once interest rates begin to rise (as they will and must) and when math (e.g., reality) collides with fantasy.

In a frightening article at CNBC, Peter Tanous discusses the problem, using simple math to illustrate:
Since it began in late 2008, QE has spurred a vigorous debate about its merits, both positive and negative.

On the positive side, the easy money and low interest rates resulting from quantitative easing have been a shot in the arm to the economy, fueling the stock market and helping the housing recovery. On the negative side, The Fed accomplished QE by "printing money" to buy Treasurys, and through the massive power of its purchases drove interest rates to record lows.

But in the process, the Fed accumulated an unprecedented balance sheet of more than $3.6 trillion which needs to go somewhere, someday.
Here's the math:

Our current federal discount rate, which has been artificially held low because of quantitative easing, is 0.75 percent. Obama's media hamsters never seem to mention the deleterious effect that hyper-low interest rates (less than 1% in many instances) have on holders of bank savings accounts and CDs (you know, the middle class and seniors who Obama cares sooo much about. But I digress ...

Because of our enormous debt these low rates are important to keep our debt service manageable. But what if rates rise to say, the average of the last 20 years—about 5.7 percent (still quite low, but representative).

Peter Tanous comments:
So here's where it gets scary: U.S. debt held by the public today is about $12 trillion. The budget deficit projections are going down, true, but the United States is still incurring an annual budget deficit by spending more than we take in in taxes and revenue.

The CBO estimates that by 2020 total debt held by the public will be $16.6 trillion as a result of the rising accumulated debt.

Do the math: If we were to pay an average interest rate on our debt of 5.7 percent, rather than the 2.4 percent we pay today, in 2020 our debt service cost will be about $930 billion.

Now compare that to the amount the Internal Revenue Service collects from us in personal income taxes.

In 2012, that amount was $1.1 trillion, meaning that if interest rates went back to a more normal level of, say, 5.7 percent, 85 percent of all personal income taxes collected would go to servicing the debt. [emphasis mine] No wonder the Fed is worried.
With every passing day, Barack Obama takes me back to my youth and reminds me of a face that I saw each month on a well-known periodical, MAD Magazine. The face was that of one Alfred E. Neuman, and his signature phrase was a simple one, "What? Me Worry?"

It seems to me that through astonishing fiscal ignorance or gross fiscal irresponsibility, Barack Obama and his supporters are following in the hallowed footsteps of Mr. Neuman. What? Me Worry?

You better.