Stimulus or Debt Service?

“But, how does it affect me?”

I’m pretty certain there has never been a time when more options have been available to us. Long gone are the days of having 3-4 TV channels and having to just ‘deal with it’. Choices follow us everywhere we go and we can build a life surrounded by like-mindedness and purge most anything that contributes to our disharmony. Because of this, our views can become self-centeredly distorted at times. Guilty 🖐

Zero interest rates. Chit-chat about %’s turning negative? Search for yield! Look for dividends. Financing deals that’ll get you that new vehicle. How long will my money last? If we really want to venture beyond how the Federal Reserve’s ZIRP (zero interest rate policy) affects us, we’ll discuss how they’re trying to stoke the economy, about all this crazy stimulus, and then we’ll pontificate about how their efforts have either saved our economy from imploding or have faltered. A majority of our viewpoints all center back to ourselves and ‘how does it affect me?’

Not until this morning and hearing a politician go on about our national debt inching toward $20Trillion did I change my perspective.

Annual cost to carry $20Trillion in debt if rates average 1% = $200Billion/year

Annual cost to carry $20Trillion in debt if rates average 0% = $0

Perhaps what most of us see as stimulative, is instead masquerading as the greatest RE-FI program in the history of finance. Note two items: 1) If rates average 0% there is no increase in total debt which results in an increase in carrying costs (a bit scary given politicians talking about infrastructure spending), and 2) the risk of eventually having to refinance debt at a higher rate only gets more problematic.

Regardless what happened in the market this Friday, September 9th, 2016, my intuition tells me an interest rate hike is off the table for the remainder of 2016.

Ross

 

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