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New Normal in the U.S. September 28, 2014

Posted by hslu in Economics, Taxes.
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Normal federal funds rate before 2008/2009 financial crisis was 4 to
4.25%.

PIMCO has argued that the ‘new normal’ fed funds rate in 2017 will be 2 to 2.5%.

I don’t know what it will be but I instinctively believed that it will be  a lower number because the U.S. government can’t let it go up too much.

The reason is very simple: America is broke.

Higher interest rate will increase America’s interest payment and the government can’t afford it. 

For every 1 percentage point increase in interest rate, Uncle Sam has to add $160 billion to federal government’s budget just to pay the interests on the loans.

Let’s call they what they really are: IOUs.

Don’t call it Treasury Bonds or Treasury Notes as if the government can keep issuing new ones to pay off the interests and the principles on the old Bonds. They are IOUs and they have to be paid off one day.

Just look at Japan: interest rate has stayed at or near 0% for the past 25 years becsuse of Japan’s massive national debt; now at 250% of Japan’s GDP after recent BoJ QE program. Interest payments on Japanese national debt and redemptions of JGBs by Japanese seniors account for 40+% of annual government budget. 40%.

Yet, BOJ is considering more money printing to jack up inflation which will ultimately push up interest rates and debt payments.

America is heading to that direction now that the Fed has gone through four runs of massive money printing and 8 years of near 0% interest rate policy.

We’ll have to wait and come back in 2 years to see where nrw interest rate is.

What I really like to know in 2017 is what percentage of our taxes goes to pay for the interests on the IOUs.

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