Monday, July 17, 2017

Janet Yellen on the Federal Debt

In Janet Yellen's most recent testimony before Congress, a little-covered comment gives us a sense of warning about where Washington's fiscal policies are leading us.  Here's the exchange:

Unfortunately, Ms. Yellen's comments are cut off before they are complete.  As such, here's the transcript of the exchange:

Mr. Steven Pearce (R - NM 2nd District):  I'm going though the Monetary Policy Report here and I'm going through your comments and I almost don't see anything about that number on the screen behind you that's just constantly rolling there and it's the debt .  Maybe it does not mean anything and sorta maybe it does.  Do you all ever talk about that in your committee?  Do you ever contemplate that in your position?

Ms. Yellen:  Well, I've discussed this previously with this committee and know there's....

Mr. Pearce:  I understand but we didn't get it in the report today as one of the driving factors and is something we ought to be thinking about.  So, how did it affect you all when Illinois was downgraded, their bond rating was downgraded the first of the year and they are paying what one analyst said is the highest differential in our history (Illinois bonds are currently rated at just above "junk status" - the current yield is 4.4 percent, 2.5 percentage points more than the yield on top-rated debt).  Now that's...the reason they are having to pay more and the bonds being downgraded is because they can't afford to pay the bills basically and if you hold their bond, you may not get paid.  If you went back to Detroit when it filed bankruptcy, bondholders only got 74 percent on the dollar.and so... and, I mean, it all feeds back toward this number here and the fact that it doesn't even make the print, not even the fine print that I could find, maybe I missed it but I did see the one sentence about Illinois being downgraded and there was brief discussion about Puerto Rico but the idea that we as a country are not discussing our ability to pay our bills is something that, I think there's a downside effect to the problem but the fact that your report doesn't bring it up is a little concerning to me.  And, the way that really played out was a couple of weeks ago when Chicago schools tried to issue a bond rating and they didn't get any bidders at all...none.  So, they ended up driving the rate up to seven, seven and a half, seven and three quarters or something (according to Bloomberg, the yield on Chicago school system variable rate bonds jumped to a maximum of 9 percent).  But it seems like that the people in charge of the financial stability of the country, the value of our dollar, the value of our promises to pay, it just seems like it would have little bit more importance in the document here.   I would expect, frankly, maybe a whole chapter because there are estimates that we cannot pay our bills in this country and so we continue to operate as if it's not going to matter if our ratings are downgraded.   If our interest rate goes up.  We're already running deficits which means we have to print the money every year in which to operate and it seems that the people in charge of the system would be talking about it and postulating and telling us "Hey, this is kind of serious.  Why don't we all work together and start figuring out what we can do to live within our means to just make sure that we're not paying  triple and quadruple what other people are paying for debt."  I'd love to hear your comments.

Ms. Yellen: Well, let me state in the strongest possible terms I agree that what you're showing here represents a trend that given current spending and taxation decisions is going to lead to an unsustainable debt situation with rising interest rates and declining investment in the United States that will further harm productivity growth and living standards.  I believe key thing that Congress should be taking into account in designing fiscal policy is the need to achieve sustainability of this debt path over time.  This is something I'm not just saying today but have been emphasizing for some time in my testimony.  (my bold)

You can find the remainder of Ms. Yellen's comments that are not included in the first video at the 52 minute 50 second mark here

Let's look at what has happened to the total federal debt since 1976:

Here is what has happened to the federal debt held by the public (marketable debt) since 1970:

This debt excludes the debt that the federal government owes to itself (i.e. intergovernmental debt that is owed to government departments - non-marketable debt)

Here is a graphic from the Treasury showing the amounts of both marketable and non-marketable debt effective June 30, 2017:

Here is a table showing annual federal government spending on interest payments going back to 1988 along with a breakdown of the interest expense on a monthly basis for the first nine months of fiscal 2017:

Notice how the interest owing on the federal debt  has not grown significantly over the past decade?  That's a direct result of this:

If we go back one decade to June 2007, a few months prior to the Federal Reserve's now long-term experiment with near-zero interest rates, we find this:

As Ms. Yellen noted, the U.S. government could find itself in an unsustainable debt situation.  With the current debt consisting of $14.363 trillion in marketable debt, a rise in interest rates from the current 2 percent to 5 percent (as shown in the examples above), interest owing on the marketable debt alone would rise from $287 million annually to $718 million.  If we add in the non-marketable (intragovernmental) which brings the total debt up to $19.845 trillion, the interest owing on the debt would rise from $389.7 billion to $992 billion or nearly one and a half times what the Pentagon proposes to spend in fiscal 2017.

While the U.S. dollar is the presently the global currency of choice, any number of factors could change this perception, including a war with Russia or China or both.  In large part, thanks to the beneficence of the Federal Reserve, Washington's power base is living in a false reality where overspending is never punished and ever-mounting levels of debt are considered a normal part of doing business.  We shall see.

One wonders - how does the braintrust at the Federal Reserve sleep at night given the fiscal mess that they are helping to create?  While Ms. Yellen may say that she's brought this to the attention of Congress in the past, her voice (and that of her predecessors at the helm of the Fed) have actually been quite silent when it comes to Washington and its unsustainable debt situation.  

No comments:

Post a Comment