Now, the United States has a rare opportunity to borrow at extremely low interest rates. Although the total debt burden has risen rapidly, the total interest expense has continued to decline. The United States can invest a lot of money in valuable projects without the risk of a surge in interest payments that usually hit the federal budget.

However, LawrenceSummers made it clear that there is only one issue that still needs vigilance. Summers served as Treasury Secretary in the administration of former US President Bill Clinton. He made no secret of his support for taking advantage of today's ultra-low interest rates, expanding federal loans and investing in infrastructure, green energy and social projects. He believes that the debt scale and deficit are far less important than the debt cost.

Summers put forward a key warning on his blueprint. Only by focusing on borrowing at the current long-term interest rate (the current interest rate is at the lowest level in history) and locking in the affordable expenditure in the distant future can the US Treasury avoid huge risks. To Summers' shock, the U.S. government just adopted the opposite dangerous strategy, that is, using overnight debt to finance long-term bonds.

"In fact, the government now has short-term liabilities with floating interest rates instead of long-term liabilities with fixed interest rates." Summers said in an interview with Bloomberg TV Wall Street Week on August 13. "At an extremely uncertain moment, when many people think that interest rates are very low, the decision to increase short-term debt seems strange."

Summers specifically talked about the Federal Reserve's "quantitative easing" (QE) policy, that is, using daily lending tools to buy a large number of long-term treasury bonds currently issued. The purchase scale is as high as $80 billion per month. The United States can save tens of billions of dollars every year, because the interest on these debts will be directly returned to the US Treasury in a closed loop. But this plan can easily backfire. The overnight rate paid by the United States is extremely low, in order to prevent the newly generated funds for purchasing US Treasury bonds from flowing into new loans, thus aggravating inflation.

Specifically, the Fed is attracting financial institutions to include "excess reserves" in their balance sheets. Now the Fed only needs to pay the ultra-low interest rate of 0. 15%, which can increase the money supply and curb inflation.

However, there is a great danger in front of this road. The sustained economic recovery after the blockade has led to the persistence of today's strong inflationary pressure, which may even worsen. The Federal Reserve was forced to pay a higher interest rate for $4.2 trillion in bank reserves to prevent a large amount of funds from flowing into cars, houses and consumer loans, thus pushing up prices. The extra cost will greatly increase the interest expense of the federal budget.

As the Fed will reduce the purchase of newly issued bonds, it will also reduce the actual "subsidy" provided by the central bank to the Ministry of Finance, further breaking the fragile balance. So far, the lowest bond yield in history, coupled with the tactics of the Federal Reserve to buy a large number of newly issued treasury bonds and return the interest to the Ministry of Finance, has led to a surge in debt and a continuous decline in the yield of US Treasury bonds. In addition, the practice of the Federal Reserve has brought this dilemma closer and closer. As long as there is a burst of inflation, this special balancing measure may collapse.

The biggest in history

Adjustable interest rate loan

Summers refers to the Fed's "eccentric" road, which is only part of the reason for the extremely dangerous high-pressure situation. The U.S. Treasury is also providing a lot of money for the huge stimulus spending to deal with the COVID-19 epidemic. The term of short-term national debt ranges from four weeks to one year. Overall, since the end of 20 19, the federal debt of the United States has increased by 30% to reach $22.2 trillion, of which about half is backed by overnight loans from the Federal Reserve, bonds with a maturity of 12 months or less or floating rate securities.

As John Cochrane, an economist at the Hoover Institution, said, "The danger facing the United States is the same as that of Americans who bought houses with adjustable rate mortgages during the real estate bubble in 2006."

Now, the world's largest economy is operating the largest adjustable-rate loan in history. In short, Americans are taking great risks by artificially lowering the current interest payments and making the financial situation look more stable than it really is. Summers called on the Fed to "end quantitative easing", mainly because the plan did not match the fast-rolling credit-backed multi-year bonds.

At the Fed meeting at the end of July, most members of the Federal Open Market Committee advocated the gradual withdrawal of quantitative easing from later this year. Charles Schwab's economists predict that the Fed will gradually withdraw from 5438+0 1 in June, reducing its monthly purchases by $8.5 billion.

As we all know, the Fed can continue to keep the United States on the current track by clever means. But the premise is that inflation is only a short-term phenomenon. In July, the consumer price index (CPI) rose by 5.4%, the biggest increase since August 2008. The Fed predicts that the CPI will increase by 3% in 20021year, which is much higher than the average target of 2%. In addition to promoting full employment, the primary task of the Fed is to ensure price stability.

If inflation continues, in order to maintain price stability, the adjustable-rate loan financing in the United States may carry out large-scale interest rate adjustment. This adjustment may lead to the biggest surge in annual interest payment on debt in American history, from seemingly cost-effective to surprisingly expensive. LawrenceSummers's warning will come true.

In the short term, the US Treasury will be in the majority.

Funded by expenditures promoted by COVID-19.

The new debt assumed by the United States to fight the COVID-19 epidemic has increased the financial risks in the future. Although the U.S. Treasury is now turning to long-term borrowing, the debt due in a year or two will increase by trillions of dollars, making the United States more vulnerable to the sudden rise in interest rates.

At the end of February 2009, the "public debt" owed by the federal government reached 17.2 trillion US dollars. This kind of debt includes US Treasury bonds held by individuals, companies, foreign governments and 12 Federal Reserve Bank. Among them, $2.4 trillion is short-term national debt with a maturity of four weeks to one year, accounting for 14%. $9.3 trillion is the medium-term national debt with the longest benchmark of 10 years, accounting for 58%. The 20-year and 30-year treasury bonds are 2.4 trillion US dollars, accounting for 14% of the total debt. Overall, more than 72% of the loans in the United States are medium-and long-term treasury bonds.

When the United States undertook huge unexpected expenses and loans for the COVID-19 epidemic, its relatively cautious image changed fundamentally. From the end of 20 19 to August 2020, the US Treasury Department suffered a huge deficit and issued an astonishing $2.7 trillion of short-term treasury bonds, which rolled every two months on average. Of every $4 in new loans, $3 is short-term treasury bonds.

In contrast, the U.S. Treasury only sold $65,438 +0.4 trillion in medium and long-term treasury bonds, and the income was only half of the higher-risk short-term treasury bonds. (Bond issuance data is the net value of US Treasury bonds due in the same period. )

As of August 2020, the proportion of short-term treasury bonds loans in total loans jumped by more than 65,438+00 percentage points, reaching 23.4%. Together with floating interest rate bills, the ratio of treasury bonds within one year to treasury bonds linked to short-term interest rates jumped from a quarter to more than a third of outstanding debts.

In the first three quarters of 2020, the average maturity of federal bonds fell from 69 months to 62 months, which is one of the biggest sudden declines in history.

Since then, the US Treasury has adjusted its direction, drastically reduced the issuance of short-term treasury bonds within one year, expanded the issuance scale of medium-and long-term treasury bonds with longer maturities, and gradually restored the balance of "outstanding bonds". The Debt Management Office of the U.S. Treasury Department introduced the relevant trends in detail in the third quarter update report of the federal government as of June 30.

The report includes the forecast of new debt issuance as of the end of September this fiscal year. According to its forecast, within 12 months as of September 30, the US Treasury will recover 742 billion US dollars of short-term treasury bonds, exceeding the newly issued short-term debt.

Of the nearly $2 trillion in new loans in fiscal year 20021,$ 1.45 trillion will be provided by medium-term treasury bonds with maturities of 5 years or more and long-term treasury bonds with maturities of 20 years and 30 years. The United States is returning to a more conservative and traditional path, relying on long-term bonds to raise nearly three-quarters of new loans.

In a blink of an eye, the average maturity of American debt has risen to 69 months before the outbreak of COVID-19.

Although it is a good thing for the US Treasury to restore the bond maturity to the pre-crisis level. But the problem is: even if the ratio remains at the past level, the short-term outstanding debt in the United States is still much more than that at the end of 20 19. It is more important to look at the actual amount than the proportion.

As of July, the amount of short-term treasury bonds owed by the United States reached 6.6 trillion US dollars, plus floating interest rate debt, which was 2 trillion US dollars more than all kinds of short-term debts held by 20 19 and 12. With the proportion of short-term treasury bonds returning to normal, the US Treasury will issue short-term treasury bonds again in the fourth quarter.

From now on, the US Treasury may continue to sell short-term treasury bonds and floating-rate bills to maintain the public's 30% share of the total debt. In the next few years, the Ministry of Finance will borrow about $2 trillion a year to finance the huge deficit.

Therefore, the US dollar debt and floating rate bills with maturities of two months to one year will continue to grow rapidly, because the emergency funds of the COVID-19 epidemic have greatly improved the overall debt level. Compared with 18 months ago, the growing debt of $6.6 trillion needs constant extension or interest rate reset, which makes the budget more vulnerable to inflation and interest rate rise.

The Fed may face a sharp rise in the cost of bank reserves, so it must curb inflation.

The new trillion-dollar short-term loans have brought new risks to the US fiscal path. The policy adopted by the Federal Reserve to prevent banks from injecting new supply funds into the credit system and causing the economy to overheat may lead to a sharp rise in the interest burden. Nowadays, the Federal Reserve is famous for rapidly increasing the money supply, and its challenge is to prevent trillions of dollars from playing the usual role in the era of ultra-loose money, that is, aggravating inflation.

The U.S. Treasury raises funds by selling medium and long-term bonds to financial institutions. At the same time, the Federal Reserve will deposit the issued US dollars into its own account, thus generating new funds, and then use the new funds to buy government bonds and mortgage-backed securities from banks, so as to increase the money supply and increase the credit supply of households and enterprises.

In this way, lenders have more liquidity to finance credit card balances and housing loans. Customers deposit dollars in checking accounts, banks lend some new deposits to get more deposits, and then get more loans from themselves and rival banks, thus forming a cycle and expanding consumption and business expenses in the whole economy.

In the past, if financial institutions only bought government bonds from the Ministry of Finance and then issued them quickly, the Fed would not buy them. The amount the Fed bought before was only enough to provide additional credit when the economy recovered. When inflation is imminent, the Federal Reserve sells treasury bonds to banks at attractive interest rates to recover the remaining dollars for goods and services.

Banks hold a large amount of US Treasury bonds as reserves on their balance sheets and sell some of them to the Federal Reserve when the demand for loans increases. However, the quantitative easing program launched in June 5438 +2008 10 at the height of the financial crisis changed this model. To some extent, the goal of quantitative easing is to keep long-term interest rates extremely low, boost the prices of houses, stocks and other assets, and increase the wealth of families and enterprises.

Under the quantitative easing policy, the U.S. Treasury issued larger medium-term treasury bonds (two years to 10 years) and long-term treasury bonds (20 to 30 years), and the Federal Reserve swallowed most of them.

As of mid-August of 20021year, during the period of1February, the Federal Reserve bought 978 billion US dollars of medium and long-term treasury bonds. According to my estimation, of the approximately $65,438+0.2 trillion treasury bonds with a maturity of not less than five years, the share purchased by the Federal Reserve exceeds 80%. All in all, since the middle of 20 16, the amount of two types of longer-term bonds held by the Federal Reserve has doubled to $4.7 trillion.

All the medium and long-term treasury bonds purchased by the Federal Reserve are included in the asset side of its huge balance sheet. Remember, the Treasury bonds that the Fed buys from banks are only from the US Treasury.

In fact, banks only resell bonds to the Federal Reserve. Financial institutions are well aware that the Fed will clean up newly acquired medium and long-term national debt and provide intermediary commission. "This is one of the reasons why interest rates are so low." William Luther, professor of economics and monetary policy at Florida Atlantic University, said. "The bank knows that the Fed will immediately buy the US Treasury bonds that the bank hopes to sell at the current high price."

The Federal Reserve is using trillions of new funds to buy record US Treasury bonds from banks. If banks convert nearly $65,438+0 trillion from the Federal Reserve into new loans in the past year, prices will soar. "The Fed needs leverage to ensure that the money supply is greatly increased and will not be converted into new bank credit." Luther pointed out. "The goal of the Fed is to tighten funds and prevent them from flowing into the credit system and causing inflation." The powerful tool of the Federal Reserve is to pay interest on deposits.

Over the years, influenced by the fluctuation of reserve balance interest rate (IORB), the fees paid by the Federal Reserve for segregated funds vary greatly. Six years after the financial crisis, the interest rate was only 0.07% to 0. 15%. However, with the economic improvement in 20 18, the interest rate of reserve balance jumped to 2%, and hovered above 2.4% in 20 1910-August.

Just last February, the interest rate was 1.58%. Last year, the federal funds rate was lowered to near zero, and the reserve balance rate rose to about 0. 15%.

Why are banks willing to deposit trillions of reserves and get such meager interest? Luther pointed out that one of the reasons is that banks have no choice. The Basel rules require banks to have a very high ratio of capital to risk-weighted assets, which also include loans adjusted according to default risk.

The second reason is that although the reserve balance interest rate sounds low, the Fed usually makes some arrangements to make it slightly higher than the federal funds rate for interbank lending. Moreover, when banks charge trillions of dollars in interest from the Federal Reserve, they don't have to take the usual risks. Luther said: "The reserves that banks put in the Federal Reserve are completely safe, there is no risk of default, and there is no need to provide services for this money. Although its income is very low, it is still competitive. "

The Magic of "Consolidated Balance Sheet"

The current financial story is the legend of the unprecedented assistance of the Federal Reserve to the US Treasury. The Federal Reserve has created trillions of new funds to buy record long-term debt sold by the Ministry of Finance to banks under the quantitative easing policy. Today, the Fed holds $4.7 trillion in medium and long-term treasury bonds. In this way, the US Treasury owes not outsiders, but the Federal Reserve.

Both departments are merged into the government's consolidated balance sheet, which means that the United States owes itself money. The interest collected by the Federal Reserve from the Ministry of Finance will be directly returned to the Ministry of Finance. This arrangement will eventually turn the bill with huge interests into a virtual reshuffle.

The following is my estimate of the funds flowing from the Federal Reserve to the Ministry of Finance. In 2020, the US Treasury paid the Federal Reserve about 2% of its 4.7 trillion long-term national debt, or $94 billion. For the Federal Reserve, buying US Treasury bonds does have to pay a price, but at present, the price is very small.

Only by paying interest to prevent the funds it gives banks to buy medium-term treasury bonds and short-term treasury bonds from flowing into inflation-stimulating credit can the Fed safely generate "free" funds for accumulating bonds. At present, the Fed only pays 0. 15% interest on its $4.2 trillion reserves. In fact, the Federal Reserve fully supports the US Treasury bonds purchased through the new currency, which only costs $6 billion per year (0. 15% of $4.2 trillion).

In 2020, the Federal Reserve paid $88 billion in profits to the Ministry of Finance, including $94 billion in interest received from the Ministry of Finance, minus $6 billion in reserve interest paid. For the Ministry of Finance, this deal is too good! Instead of paying $94 billion in interest to banks, hedge funds and other external parties, the Ministry of Finance transferred the money to itself with the help of the Federal Reserve.

The Federal Reserve has assisted the Ministry of Finance in keeping interest expenses in the United States below $94 billion. However, in the process of providing great help to the Ministry of Finance, the Fed has to take huge risks, because it actually uses its reserves to pay overnight debts to finance long-term debts. The negative effect of the consolidated balance sheet is that the Fed is on an exploding spaceship. Once it explodes, the losses will be passed on to the Ministry of Finance, which will eventually affect the federal budget.

The danger posed by inflation

What will happen if short-term interest rates soar? The biggest threat is that inflation has arrived and will last for a long time. In order to control prices, the Fed needs to raise the reserve ratio. The central bank is in trouble. Remember, the Fed must not let its reserves flow into new credit, otherwise it will aggravate the inflationary pressure that has begun to boil.

For example, the inflation rate remains at the current 5%. The Fed may have to pay a fee equivalent to 2.4% two years ago. If quantitative easing is withdrawn as expected later this year, the Fed will buy fewer and fewer newly issued bonds.

But this will trigger another big change that is not conducive to the Fed's bottom line.

The Fed no longer needs to return bond interest to the Treasury. At that time, the bonds will be held by external investors and the interest that should have flowed back to the Ministry of Finance will be charged. So quantitative easing will lead to higher book costs. However, we should also consider how the fluctuation of interest expenditure of nearly $654.38+000 billion per year will affect the federal budget due to the sharp rise of the interest rate of the Federal Reserve Bank.

In 20 19, the United States paid $376 billion in interest on the average debt of 17.5 trillion. Since then, the interest rate of the whole economy has fallen sharply, and the cost of new loans has been greatly reduced. However, the sharp drop in reserve interest rate has also played a great role. Surprisingly, the Congressional Budget Office predicts that although the debt will increase by nearly 40% from the level of 20 19 to $24.3 trillion, the interest paid by the United States will miraculously drop to only $304 billion.

Imagine what would happen if the reserve interest increased by $654.38+000 billion? Interest costs will increase by 33%. This is not just a question of reserve interest. The rising inflation rate will also greatly increase the cost of $6.6 trillion in short-term treasury bonds and floating-rate debt in one year. Overnight, the US budget forecast will be in chaos. This is what Summers calls danger. He's right. We don't know when the most powerful financing weapon will be adjusted, but we can imagine how destructive it is. (Fortune Chinese Network)

Translator: Feng Feng

Revision: Lin Xia

end