Earlier in the week, we noted that the Fed’s perennial monetary stimulus measures are devaluing the dollar, harming consumers, and depleting the savings of retirees through negative interest rates (when inflation is factored in).
However, there is a more insidious function of the monetary stimulus and money printing: it helps sustain Obama’s debt.
In order to achieve maximum sustainable employment, pursuant to the duel mandate of Humphrey-Hawkins, the Fed has kept interest rates near zero for years. This has alleviated the burden of Obama’s astronomical debt because interest paid to shareholders of treasuries is at historic lows. To that end, we only pay about $230 billion per year in interest on the debt. But as Investors’ Business Daily noted several months ago, “If Washington had to pay the average interest now that it paid in 2000 (6.4%), it would be paying $500 billion more each year to stay afloat.”
In other words, without the extraordinary Fed policies, the annual deficits would rise to over $1.7 trillion. Hence, the Fed is covering Obama’s debt rump with low interest rates.
Just to put this in perspective, consider the following. Obama plans to raise $80 billion in new revenue from massive tax increases. Yet, that new “deficit savings” would be wiped out 6 times over by the increased burden from interest on debt payments debt payments. The Fed won’t have the luxury of driving down interest rates forever. Eventually, the demand on our treasuries will begin to ease and we will have to pay more to service the debt. At that point, we will be paying more in interest than all military spending.
It would be nice to see how much leverage Obama would have with the tax cliff if Bernanke would stop playing interference for him at the Fed.