A positive projection

I have speculated that with some minor tweaks, it might be possible to show that the debt is sustainable indefinitely. So here is a projection based on some more positive numbers. I am not going to show all of the numbers because formatting is such a pain in blogger, so I will just list my assumptions.

1. Start with the most recent CBO's estimate of the President's budget, available at http://www.cbo.gov/ftpdocs/121xx/doc12130/04-15-AnalysisPresidentsBudget.pdf All the numbers listed are in billions.

2. For revenue, I accept its estimates through 2012, but then assume a 5% increase thereafter. The 2012 amount is 2544, 2013 is 2671 through 2032 which is 6750.

3. For outlays, I accept its estimates through 2021, but then assume a 5% increase. The 2021 amount is 5756, and the 2032 amount is 9845.

4. I assume that the assets of the Federal Reserve can be used to offset the debt. I am estimating the balance on 9/30/2011 will be 2700 and that it will increase by 7% annually, so the 2032 amount will be 11,180.

Here are some of the lines:
2021: revenue 3947, outlays 5756, annual deficit 1809, total national debt 29163, Fed assets 5311, net national debt 23852
2032: revenue 6750, outlays 9845, annual deficit 3095, total national debt 56154, Fed assets 11180, net national debt 44975

By the way, at this rate, the national debt will first exceed $1 quadrillion dollars in 2089.

My conclusion from this thought exercise is that it is possible to increase the national debt indefinitely, even if the annual deficits never decrease below $1 trillion/year. What is important is that the outlays not increase by a greater percent than revenues.

The Fed can continue to monetize part of the debt to pay for it. Anything the Fed monetizes is free money because the interest paid on that portion goes back to the Treasury.

The biggest threat to the long-term sustainability of the system that I see at this point is that the Fed will monetize an excessive amount of debt and introduce hyperinflation this way. So I think it is as important to monitor the Fed's balance sheet as it is to monitor the national debt. The current numbers are available here: http://research.stlouisfed.org/fred2/series/BASE and the latest number for the monetary base is 2625, which is up more than 30% since January. (There is a minor difference between Federal Reserve assets and the Adjusted Monetary Base which I am ignoring for this calculation).

Anyways, good news. The apocalypse has been delayed indefinitely.

Update:  A $1 quadrillion national debt offset by a Fed balance sheet of $500 trillion seems unlikely, so I will call this a crisis in 2089.

Update 6/19/12:  I call this Model E-1.  I will have to think about this some more.