Impact of interest rates and the role of the Federal Reserve
Bret Baier calculates 'The Cost of Spending'
- Duration 6:44
- Date Dec 20, 2012
Bret Baier calculates 'The Cost of Spending'
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Did six ahead.
Everyone agrees the US government is spending more than it's taking hand and that that is unsustainable.
The question is does that all lead to Greece.
Part four of our series the cost of spending looks a dangerous consequences interest rates and the role of the Federal Reserve.
If -- government deliberately devalues it destroys the value of the currency.
It will destroy the middle class.
When Republican presidential candidate Texas congressman Ron Paul railed against the Federal Reserve.
He got a big applause from growing crowds we don't have the money they run out borrowing power.
Guess what they do you would have never guessed they start -- money.
Despite calls and other criticism the Fed has acted even more aggressively.
Just last week doubling down on previous commitments to keep buying billions of dollars of government treasuries.
Printing more money each month.
To keep interest rates low for the foreseeable future exceptionally low levels of the federal funds rate -- likely be warranted at least through May 2015.
Why are they doing it.
Let's go back to the national debt clock.
Remember we were staring at it earlier in our series.
As it tipped well past sixteen point three trillion dollars.
As -- -- now compared to the US economy the debt to GDP or gross domestic product ratio.
Is almost at 102%.
The highest since just after World War II.
And that's with extremely and historically low interest rates.
Even at these rates that interest will cost the US more and more every year 222.
Billion dollars in interest payments on the debt this year.
Billion by 20/20 two.
At current rates.
I mean this stuff is no joke so we have this big interest in keeping these interest -- -- Low and also incidentally in keeping interest payment slow so that we can so that other parts of the economy can continue to function or.
Function as well as they can under the vaguely recessionary circumstances.
Because for decades across the country across the economy we have essentially put things on a credit card borrowed to bond leverage done.
Every sector has done it.
Now that credit market debt by the broadest measure possible.
Is way out of proportion with our economy.
For a look at -- our country stands let's take a look at the ratio of our credit market debt to GDP.
The gross domestic product really the best way to measure our economy overall over the past seven decades outlined on this chart.
That ratio has steadily increased with a high of 370%.
Downwards slightly to 350%.
Now as you look at this chart all the different colors are different sectors of the economy.
You can look at the different sectors on the bottom there is government then you have GS seized those are Fannie and Freddie.
Households corporate financials.
Now back in the fifties and sixties you can see all of it was tightly compressed altogether there wasn't a lot of borrowing.
But then the country started getting leveraged and you can see the mountains start to climb.
By the 80s90s.
You can see the separation and then the climb.
All the way the 2012 a 350%.
The country is over leverage so no.
If interest rates rise even slightly.
All of these sectors may have a hard time paying the bills.
Former democratic senator Evan -- Servicing the debt is hard now.
This is with interest rates at record lows.
God forbid something should happen to cause interest rates to go up just a little back to where they ordinarily would be the burden of this -- will become immensely greater.
And start taking away from everything else and so unfortunately as tough -- this is we've seen nothing yet because interest rates eventually are gonna go up.
Economist John Taylor your interest rate goes from 22%.
To 4% literally doubles.
The amount that you have to pay on a given amount of debt and with the -- so that's an economist -- that's the problems when they come.
Will appear very rapidly once that increase stars.
It's going to be very difficult to contain.
That's why -- while we have the breaks down while things are under control.
This is the time to implement more positive policies unfortunately.
So far I haven't seen any inclination to move in that direction.
Alice Rivlin budget director for President Bill Clinton.
Our debt is rising in relation to the economy.
And we all about half of -- to other countries so if our foreign creditors.
Not to mention our domestic creditors.
Lose confidence in us then we're in deep deep trouble.
Because interest rates could go up rapidly that's going to affect everybody.
People who buy houses people who buy cars people.
Businesses who want to invest borrowing money would get gradually or suddenly.
Very very expensive and that can.
Can't destroy American prosperity there's a lot at stake here.
Which brings us back to the Federal Reserve.
Since 2007 to further reduce long term rates.
The Fed has amassed more than two trillion dollars in government debt and mortgage backed securities.
And it's now the third round of what's called quantitative easing.
Quantitative easing basically means that they're injecting.
Money into the money supply.
There herb they're buying all sorts of securities and exchange for adding more than money supply.
Under ordinary circumstances that would fuel inflation right now it's not there were sort of counting on it never fueling inflation but the truth of the matter is.
You look at history sooner or later inflation's gonna come around from an inflation comes around that really hits the American people very hard.
And it usually comes from you don't expected and you look back can you say off.
We should -- change policy a year ago but now it's too late.
People it's gonna hurt our.
Seniors on a fixed income that are living off their saving suddenly the savings are not going to be worth very much.
Young people that are trying to get a start they're gonna find it anything -- they -- saved for their future.
We'll be worth a lot less it'll be ordinary people working people poor people -- -- really gonna suffer when finally this inflation comes around it where there were.
There were playing -- it's really playing with fire.
It is scary and frankly a lot of people call it depressing tomorrow in our final.
Part of this five part series the cost of spending some real world solutions.