The debt monster is coming into view. By Adam Creighton in The Australian.
Our governments borrowed like there was no tomorrow during the Covid pandemic, issuing hundreds of billions of dollars’ worth of bonds during 2020 and 2021 at ultra-low interest rates to “keep us safe”. …
The federal government’s gross liabilities this week bobbed above $1 trillion for the first time. … State governments’ non-financial public sector balance sheets reveal another $706bn as of June …
Rising interest rates will destroy the welfare state and introduce raging inflation, as the bonds/loans need refinancing:
The four biggest states have almost $277bn of bonds outstanding, with coupons, or interest costs, averaging around 2 per cent …
When those sweet deals progressively expire from 2031, they’ll need to be refinanced at current long-term borrowing rates, which for state governments are around 5.5 per cent for 10 years, adding well over $8bn a year to their annual interest costs. …
To put that in perspective, the entirety of Victoria’s payroll and insurance taxes will be just about enough to cover the state’s annual interest bill. …
The commonwealth faces the same problem, too, having around $280bn of cheap Covid-era debt on the books at a coupon of 3 per cent or less.
Toby Johnston, former chief economist of the Future Fund, estimates those bonds will cost an extra $9.5bn a year from 2030 on, assuming the federal government faces today’s prevailing 10-year yield of 5 per cent.
Of course, interest rates could well be higher still, given grim forecasts embedded in practically every government balance sheet in the developed world.
“The global bond market is sending a clear signal to all governments – get your house in order or face much higher debt service costs,” Johnston, now director of Westwood Strategic Advisers, tells me.
“Every additional dollar spent servicing past debt is a dollar that cannot be used to fund services, reduce taxes or invest in the national’s future,” he adds.
The cycle has turned. The trend forecast is for rising interest rates for the next 40 years, in contrast to the 40 years of falling interest rates to 2022. Falling interest rates allowed everyone to load up on debt, expecting to be able to refinance it and never pay back the principal. Thus, massive amounts of money were created (money is debt in our current system — look it up if you doubt it), and asset markets are all stretched to the upside (except for the competitors to paper currencies, of course).
Uh uh, that has ended. The inevitable inflation from those low interest rates is now an irrepressible problem, so interest rates must rise to suppress inflation. But rising interest rates will send governments and corporates bust. So, governments will keep interest rates artificially low some more, which will just feed the inflation further. The over creation of money will thereby continue, just not as strongly as it has since 1982.Which will require even higher interest rates at some point down the road, to rein in that inflation.
The doom loop is approaching, as we can see in the account of Australian government debts as above.
Japan is perhaps the most indebted government in the West, because it kept interest rates near zero for so long. If Japan’s entire stock of government bonds were refinanced at its current 2.9% interest rate, interest alone would consume about 42% of current tax revenues. At an average rate of about 6.9%, interest would consume the entire tax take. Clearly, something has to bust.
For the US, the interest rate that consumes all the tax income is 14%.
In the US, interest already exceeds the defense budget, and it’s only going higher as bonds are refinanced at higher rates.