Deficit Hypocrisy – Pragmatic Capitalism

I was watching this video on Yahoo Finance this morning with Jim Rickards of Austrian economics fame. He calls the low interest rate policy of the Fed a “tax on savers”:

“[Interest payments] would have gone into the pockets of savers so they could invest and spend – people rely on it for their retirements. This is looting savers.”

But there’s a contradiction in his commentary. Rickards has stated that the “Obama deficit” is making things worse. In an article last year Rickards wrote:

“Citizens who insist that government stop talking about cuts and start the actual process of cutting spending now have got it right.”

The problem here, is that the Fed’s zero interest rate policy has substantially reduced government interest payments. In other words, if the Fed raised rates on government debt you’d start earning a lot more on your savings because all those retirees who own US government bonds would instantly start getting a government subsidy via the interest payments.

Interest outlays are part of the annual budget deficit. For instance, at present, the government pays about $225B a year in interest outlays. That’s about 1.4% of total debt with the current interest rate structure. Let’s say the government decided to raise interest rates structure to something equalling 4% of total GDP. That means the government would be paying total interest outlays of about $600B a year. That’s almost $400B+ more per year for savers to “invest and spend”. That’s a lot of money. And it’s a significant rise in the government’s budget deficit since the interest outlays are a cost to the US government.

So, Rickards is contradicting himself here. He wants higher interest payments so savers stop getting “looted” and a lower government budget deficit at the same time! So which is it? If you want higher interest rates on government debt (which makes up a huge portion of private saving since most of the government’s debt is owned by retirees, pension funds, etc) then you’re implicitly in favor of more deficit spending. You can’t have it both ways here Austerians….

Cullen Roche

Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.

He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.