Most Americans pay little attention to U.S. Federal Reserve monetary policy, but Fed rate hikes are likely the biggest threat your retirement faces.
That’s because Fed rate hikes will play a primary role in fueling the already bloated national debt ($20.6 trillion and counting) and America’s ability (or inability) to keep up on the interest payments.
And those skyrocketing payments will hit your retirement in several ways, most notably by reducing the amount of money available to finance Social Security payments.
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Interest payments on the national debt currently cost $269 billion per year, consuming about 6.8% of the federal budget and representing 1.4% of the nation’s GDP.
But those costs are expected to rise rapidly as Fed rate hikes accelerate the amount of interest the United States must pay on its obligations.
Since ending its policy of near-zero interest rates at the end of 2015, the Federal Open Market Committee (FOMC) has raised its benchmark rate five times, increasing it from 0.25% to 1.5%.
At least three more Fed rate hikes are expected in 2018, with several more possible in 2019. The higher interest obligations of new U.S. debt sold in the wake of these hikes will compound over time, digging America into a deeper and deeper hole.
Urgent: An $80 billion cover-up? Feds use obscure loophole to threaten retirees… Read more…
According to projections by the Congressional Budget Office (CBO), interest payments in 2027 will balloon to $818 billion, growing to 12.35% of the federal budget.
The problem gets increasingly dire as you project further into the future. The CBO forecasts that by 2047 interest on debt will gobble up 21% of the federal budget – three times as much as it does now. In dollar terms, interest on our debt will reach an astounding $5.24 trillion – more than the total 2018 federal budget of $4.1 trillion.
Here’s why this is trouble for your retirement…
Why Fed Rate Hikes Pose a Risk to Social Security
The first thing to realize about interest payments on U.S. debt is that it absolutely must be paid. Not paying would put the United States in default on its obligations. That would destroy the nation’s credit rating, dramatically increasing interest rates on new borrowing – the last thing you want when you’re already drowning in debt.
But as more money gets siphoned off to service debt, less money is available to fund the rest of the federal budget. That includes two major portions of the federal budget of particular interest to retirees – Social Security and Medicare.
As the rest of the baby boomers retire over the next decade, the costs of funding these programs will also rise substantially.
Take Social Security. People have been assured that the $2.28 trillion trust fund will cover retiree checks through 2033.
But the so-called trust fund is nothing but a pile of IOUs in a West Virginia filing cabinet. They’re “special obligation bonds” that must be bought back by the U.S. government.
And the money to buy those bonds must come out of the federal budget, unless the weak-willed politicians in Washington raise taxes.
Something will have to give. And as we’ve seen, it can’t be interest on the debt. The pressure from the growing interest payments increases the possibility that benefits will be cut even before the trust fund runs out in 2033.
But the government’s money problems – which will be passed on to you – go even deeper…
The Government Is in Budget Quicksand
As interest payments eat up an ever greater portion of the federal budget, the government will be forced to borrow more money to cover the budget deficits they cause – essentially using one credit card to pay off another.
This will push the national debt further into risky territory in relation to GDP, a measure of fiscal sustainability. According to the CBO, the ratio of debt held by the public to GDP was 77% in 2017.
But CBO projections have that figure rising to 89% by 2027, 106% by 2035, and 150% by 2047. That would far exceed the previous record of 106% set in 1946, when the United States ramped up spending to fight World War II.
Governments and central banks know only too well that debt on that scale must be dealt with to avoid such crippling problems as:
- Budget deficits spiraling out of control
- An increasing drag on the U.S. economy as the public sector sucks capital from the private sector
- The rising risk of a fiscal crisis (worries the United States will struggle to meet its obligations) that would cause interest rates to spike much higher
And it should come as no surprise governments have an underhanded strategy for offloading an excessive debt burden on citizens.
Here’s how they do it…
How the Government Secretly Steals from You
Governments actually have several options for getting citizens to pay off national debts.
Austerity measures – spending cuts on government services and entitlement programs coupled with higher taxes – is one way to do it. But such moves inflict a lot of financial pain on citizens and stifle economic growth. Politicians who implement austerity tend to get voted out of office quickly.
A government can also try printing more money to pay off its debts, but that usually leads to very high inflation rates. Rapidly rising prices are also unpopular with citizens, as it makes them all poorer by devaluing salaries, stock portfolios, and savings.
Governments are all about self-preservation, so the preferred method, to stick John Q. Public with the bill for high national debt, is much more insidious.
It’s called financial repression, and it’s subtle enough to escape the notice of most people. Financial repression is how the United States paid off its excessive debt from World War II.
Basically, financial repression erodes the value of the national currency slowly so that each citizen’s wealth shrinks by about 3% to 4% per year. This helps the government by reducing the value of the debt it owes.
For instance, the value of $1 million of U.S. debt in 1946 was more than halved to $463,300 after 25 years of steady inflation and relatively low interest rates.
In trying to cope with the impact of the Great Recession of 2008, the Fed returned to financial repression. The near-zero interest rates that were supposed to stimulate the economy meshed with inflation of about 1.5% to bleed wealth out of U.S. citizens.
The Fed rate hikes won’t fix this. To maintain financial repression, the government need only ensure that inflation outpaces the higher interest rates.
Watch for the Fed to loosen its stance on inflation over the next year as interest rates rise. Some Fed officials have already started talking about loosening its 2% inflation target.
In January, Boston Fed President Eric Rosengren called for the Fed to explore the use of an “inflation range” of 1.5% to 3%.
Last fall, former Fed Chair Ben Bernanke discussed a similar idea, suggesting that inflation could be allowed to rise to as much as 4% under certain circumstances.
Floating these ideas now will make them more palatable to the public and the markets when the time comes to implement them.
You can also bet the Fed will avoid raising interest rates so high that savers will benefit.
Here’s what you can do to protect yourself…
Minimize the Damage from the Fed’s Wealth-Destroying Policies
While you can’t control what the Fed does, you do control your investments. And a sound strategy is the best way to fight back against a policy of financial repression.
Money Morning Chief Investment Strategist Keith Fitz-Gerald says that if you have a sound investing strategy, you’ll be fine.
“Take your cue from the federal government and invest in companies that have the pricing power to get around this problem,” Fitz-Gerald said.
He recommends investors look for investments with the strongest prospects for growth in industries that make things people can’t live without.
Fitz-Gerald’s investing philosophy revolves around six “Unstoppable Trends” – opportunities built on such inevitabilities as changes in demographics, advances in medicine, and the need for more energy.
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