Diamonds and Dogs
Can You Say QE3 (or QE4, QE5, etc.)Noted economist Lawrence Lindsey recently opined in the Weekly Standard that the Fed had painted itself into a corner. In a nutshell, Mr. Lindsay suggested that the borrowing cost for the US government is now at 2.5% as the Fed keeps interest rates negative to spur growth and save the big banks. For the past 3 decades, the government's borrowing cost has averaged 5.7%. Debt is now at $14 Trillion dollars and expected to grow to $25 Trillion by 2020. With the debt rising exponentially to $25 Trillion, and "normalized" cost to service this debt 3 percentage point higher, the yearly cost of higher interest rates in 2021 could be about $800 billion. $800 billion in additional interest costs per year. That would wipe out all of the Ryan proposals cuts by itself. It is 20X the amount that the Congress struggled to cut ($37 billion) in March. The Fed has no place to go and that is the case for interest rates. Painted into the proverbial corner, the Fed cannot raise rates, no matter what happens to inflation, no matter what happens to seniors on a fixed income, and no matter what happens to savings. This is potentially a chapter from Japan that we do not want to read. Stocks finished a quadruple witching Friday in the plus, barely and without tech stocks.
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