Karl Smith: Why Is The US Government Still Collecting Taxes? THE DEFICIT EARNS A PROFIT!!!

I hesitate to excerpt from this because it says it all so well and so briefly. But:

…the more taxes the US government collects, the more money it loses.

When the US government declines to sell a 10 year Treasury bill at a real rate interest rate of –0.57 percent it is agreeing to pay, to the bond market a fixed rate of 0.57 percent over the next ten years. …

Now you say, sure but interest rates can turn [on] you. And, they absolutely can. But, at minimum you must recognize that you are arguing that the US government enter into an interest rate swap with the Global Financial system because [you that] your intuition about the path of interest rates is superior to that of the Global Bond Market. 

And, be aware, the Counterparty in this swap is folks like Goldman Sachs, JP Morgan, Morgan Stanley, and yes Barclay Capital.

Are you sure that you want to buy this swap?

Why Is The US Government Still Collecting Taxes?: Should Lambs Lay Down With Lions Edition – Forbes

Cross-posted at Angry Bear






3 responses to “Karl Smith: Why Is The US Government Still Collecting Taxes? THE DEFICIT EARNS A PROFIT!!!”

  1. John Wilkins Avatar
    John Wilkins

    Interest rates in the United States will “not turn on us” until the Fed says they can. The fed could announce tuesday morning it will not allow the 30-year bond yield to go above one percent, and the market would instantly comply. That is why the fed does not really need to purchase bonds in Operation Twist or GE. It could simply announce the target and it would get the job done. The market knows the United States, as a currency issuer, can never run out of the fiat money it has the sole power to create.

  2. JKH Avatar

    This is a thoroughly muddled ‘argument’ (on his part).

    His actual analysis has nothing to do with taxes.

    Its a choice between short term funding and long term funding.

    And its got nothing necessarily to do with an interest rate swap.

    Short funding swapped long is equivalent to long funding. You don’t need a swap to do the comparison. Just compare the expected funding cost over the same time horizon.

    So you do a projection of implied forward rates, etc.

    Then you choose.

    And you can make a good point on that basis. It’s about interest rate risk, the expected cost of the debt, and the choice between funding short and funding long. Funding long looks cheap.

    But his case is a muddle, sorry.

    The argument he’s attempted to make, using interest rate alternatives, has nothing to do with taxes.

    The tax/debt comparison isn’t covered by a short/long interest rate expense comparison. The latter is a debt/debt comparison.

    Wouldn’t have bothered with this except that I looked up his post wondering what he was getting at.

    A tax/debt comparison would be interesting, but he hasn’t done it.

  3. JKH Avatar


    the implication of his argument (seems to me) is that taxes are equivalent to debt with a zero real interest rate

    that seems to be the only direct connection he makes as the basis for choosing debt with a negative real rate but not debt with a positive real rate, either instead of taxes

    somebody will have to prove that assertion