'It Doesn't Matter Which Way You Go- So Long As I Get Somewhere'

'We are all mad here!'

We were talking to a friend yesterday about the stock market recovering to exceed its peak of 2007, right before it fell to its valley when the banking system nearly evaporated in 2008.

Remember? That was not that long ago, you know.

'There's something that just seems 'odd' about it all', he said.

The current state of affairs in America reminds us of that great Socratic philosopher in 'Alice in Wonderland', the Cheshire Cat when he counsels Alice on where to go to get to where she wants to go:

"Would you tell me, please, which way I ought to go from here?"
"That depends a good deal on where you want to get to," said the Cat.
"I don't much care where –" said Alice.
"Then it doesn't matter which way you go," said the Cat.
"– so long as I get somewhere," Alice added as an explanation.
"Oh, you're sure to do that," said the Cat, "if you only walk long enough."

Here's something that will really make it very odd one day if it happens: higher interest rates. Of any magnitude over the current absurdly low interest rates of 1%, 2% or 3%.

We currently have close to $17 trillion of 'official' national debt on the books of the US Treasury. In actuality, the 'real' debt is closer to $12 trillion since this is the debt that absolutely has GOT to be paid back each and every month in the form of clipped interest coupons or direct payment to bondholders around the world.

The rest of the debt is the 'imputed' interest ascribed to each 'trust fund' (which is fake as well in terms of being a 'true' trust fund in the traditional banking sense of the word). This is a number that is basically 'made up' every year by OMB and CBO analysts to estimate 'what would have been the interest paid' to the SS Trust Fund and others had money actually been paid to them.

We know that sounds confusing: 'fake' interest 'imputed' to be paid to the 'fake' trust funds. Welcome to Washington where even Alice in her Wonderland would have never ceased to be amazed.

So let's use $12 trillion in debt as the base of our discussion today and give our law-makers and budget-breakers in Washington the benefit of the doubt and some very lenient credit.

Today, we are spending close to $220 billion in net interest costs to service that $12 trillion in national debt. Probably half of the interest checks are going to bondholders in China and other overseas foreign sovereign powers. The average interest rate on these bonds are an absurdly historically low 2%.

But that is not the only thing to consider. Almost all of our national debt today is in very short-term maturities, 2 years or less. When interest rates are low for your mortgage, what do you do? You refinance for the long-term, up to 30 years if you can, right?

Well, the United States of America can't sell any 30-year bonds anymore because who would be crazy enough to hold onto $12 trillion in debt for the next 30 years? When interest rates return to some form of 'normalcy' again, say at 5% or so, anyone left holding these bonds will see the value of those bonds drop anywhere from 5-15%.

The people who would otherwise hold those bonds to maturity would get 2% interest per year for 30 years and then get their money back for sure at the end of the term. But do you seriously think that earning 2% per year is going to do you any good if inflation returns to say 3% per year? 5% per year?

You'll be going backwards into wealth destruction if you pursue that strategy. 'Don't do it!' is all we can say.

Here's our question for you to noodle on today:

What happens when interest rates do return to their normal historical rates one day?

If we are not careful, the answer could be any of the following answers: 'total chaos'; 'rampant inflation' or 'really, really bad news for the President and incumbent congressmen and senators serving at the time'.

Let's make it simple and assume that all the debt we are really going to ever pay for in cold hard cash is the $12 trillion today, not the $17 trillion on the books. That is going to swell to about $18 trillion by 2020...regardless of if President Obama and Congress cut the Grandest of All Grand Budget Compromises the World has ever known!

It is already baked in the cake. With Obamacare looming as one of the biggest vacuum sucker-uppers of federal debt and deficit-spending in our nation's history, it could be $20 trillion or $25 trillion. Make no mistake about it: Obamacare is already costing 3 times what President Obama, Nancy Pelosi and Harry Reid 'promised' it would cost when passed in 2010.

We are just shocked it hasn't already been estimated to cost 10 times its original cost. That is the nature and history of massive programs passed by an ambitious President and a compliant Congress.

The entire federal budget today is around $3.7 trillion. Interest costs make up about 6% of that cost or around $224 billion. Not too bad, you might say. Today.

Since none of this debt is locked in at 2% for the next 30 years, it will have to be 'rolled over' or refinanced every couple of years from now on. So if we have to rollover $12 trillion today for 2 years, and interest rates suddenly jump to an average of just 4% which is not 'crazy' under any historical American standard or measure, what will be the interest cost for the next two years in the federal budget?

$480 billion per year. $12 trillion times 4%=$480 billion. Pretty easy calculation to make.

Ok, but we have already established that the national debt is going to be $18 trillion by 2020 regardless of what President Obama and Congress does this year, next year or in the last and final year of his 8-year presidency in 2016. What will the annual interest costs be then if interest rates stay around 5%?

$900 billion. Per year. Or close to $1 trillion of your hard-earned taxpayer dollars going to pay for nothing for this country's roads, schools, farms, military, social safety net or the environment. Instead, all of these taxpayer dollars will go to pay off past obligations and debt and that is it.

Let's just have some fun with numbers and see what the interest rate costs might be in 2020 if somehow, someway interest rates spike to 10%. It could happen. They were 21% just over 30 years ago when many readers were still in college or high school.

$18 trillion times 10% is $1.8 trillion. Not 1.8 billion dollars. 1.8 TRILLION dollars. Per year.

The entire federal budget in 2020 is expected to total only $5 trillion to begin with. Interest rate costs could approximate close to 40% of the annual federal budget in 2020!!!!

See for yourself. CBO Budget Projections  We are not smart enough to make this stuff up on our own, you know.

So whenever someone says: 'Gee, you know, something just seems a tad bit 'odd' about this current stock market run and the economy in general', you'll know the underlying cause for this concern.

It is called 'Math'. 'Economic and Fiscal Reality'. 'Truth'.

Something this President doesn't seem to want to acknowledge during his entire Presidency. He seems to be the modern-day Cheshire Cat with his bright cheery smile and quick quip at the podium or even when he missed 20 out of 22 shots the other day on the basketball court.

It is time for leadership. Who will provide it?

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