"While there are many inputs that are functionally relevant, we look for a couple of warning signs. We move a nation out of the risk free category as soon as they spend more than 10% of their central government revenues on interest alone. We also worry about debt loads that represent more than 5x the revenue of the responsible government. When these and other characteristics are met or exceeded, it can quickly move the country into checkmate."
--http://www.scribd.com/doc/74335711/Hayman-Nov2011
Wednesday, November 30, 2011
Tuesday, November 29, 2011
Debt and Money Supply
What if the proper comparison is not debt to GDP but debt to money supply? So you are really comparing an asset (money) to debt.
The ratio was 1.26 in 2008; 1.41 in 2009; 1.56 in 2010; and 1.55 in 2011. As long as this ratio doesn't keep increasing then there shouldn't be a problem right? Yea, more debt, but also more money to pay for it. No worries.
Update: Is the economy like a machine with 2 related levers, interest rates and money supply? You push on the gas when you want to speed up, and you pull up when you want to slow down. So it just needs more gas (money supply).
The ratio was 1.26 in 2008; 1.41 in 2009; 1.56 in 2010; and 1.55 in 2011. As long as this ratio doesn't keep increasing then there shouldn't be a problem right? Yea, more debt, but also more money to pay for it. No worries.
Update: Is the economy like a machine with 2 related levers, interest rates and money supply? You push on the gas when you want to speed up, and you pull up when you want to slow down. So it just needs more gas (money supply).
Monday, November 28, 2011
Monetary Inflation
The Monetary Base (M0) is up 34% over last year (2663 on 10/1/2011; 1987 on 10/1/2010). M2 is up 10% over last year (9559 on 10/1/2011; 8699 on 10/1/2010). This hasn't hit the consumer price index yet but it will.
Sunday, November 27, 2011
$708 trillion of derivatives
There are now $708 trillion of derivatives outstanding according to the BIS. The biggest category of these is Interest Rates Swaps at $442 trillion.
I don't know what this means. Probably nothing, unless something unusual happens, like a sudden rise in interest rates. And then if a big counterparty fails, a la Bear Stearns or AIG, all hell will break loose.
I don't know what this means. Probably nothing, unless something unusual happens, like a sudden rise in interest rates. And then if a big counterparty fails, a la Bear Stearns or AIG, all hell will break loose.
Friday, November 25, 2011
Should the Fed bail out Europe?
This is just a thought experiment. What if the Fed bought up 200 billion Euros, and then bought up Italian or French debt? The purchase of the Euros would weaken the dollar slightly which would be good for US economy. And the purchase of the bonds would help stabilize Europe.
See also: http://www.zerohedge.com/news/will-fed-buy-efsf-bonds
"The EFSF should announce bonds sales to the Fed. The Fed should purchase 200 billion Eur of EFSF bonds today. They should commit to further purchases of 100 billion in Q1 and Q2 next year. The Fed has been dying to do some quantitative easing and has been looking for a liquidity crisis in need of some liquidity. It has also been looking (quietly) for ways to keep the dollar weaker."
See also: http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/8918784/Should-the-Fed-save-Europe-from-disaster.html
"The Fed can inject money into the economy in still other ways. For example, the Fed has the authority to buy foreign government debt. Potentially, this class of assets offers huge scope for Fed operations," he [Bernanke] said.
Berkeley’s Brad DeLong said it is time for Bernanke to act on this as the world lurches straight into 1931 and a Great Depression II. “The Federal Reserve needs to buy up every single European bond owned by every single American financial institution for cash,” he said.
The Fed could buy €2 trillion of EMU debt or more, intervening with crushing power. The credible threat of such action by the world’s paramount monetary force might alone bring Italian and Spanish yields back down below 5pc, before one bent nickel is even spent.
And yet another article saying the same thing:
http://www.aljazeera.com/indepth/opinion/2011/11/20111128143150223756.html
"Fortunately, the Fed has the tools needed to prevent this sort of meltdown. It can simply take the steps that the ECB has failed to do. First, and most importantly, it has to guarantee the sovereign debt of eurozone countries. The Fed simply has to commit to keep the interest rate yields on debt from rising above levels where it risks creating a self-perpetuating spiral of higher debt leading to higher interest rates, which in turn raises the deficit and debt."
See also: http://www.zerohedge.com/news/will-fed-buy-efsf-bonds
"The EFSF should announce bonds sales to the Fed. The Fed should purchase 200 billion Eur of EFSF bonds today. They should commit to further purchases of 100 billion in Q1 and Q2 next year. The Fed has been dying to do some quantitative easing and has been looking for a liquidity crisis in need of some liquidity. It has also been looking (quietly) for ways to keep the dollar weaker."
See also: http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/8918784/Should-the-Fed-save-Europe-from-disaster.html
"The Fed can inject money into the economy in still other ways. For example, the Fed has the authority to buy foreign government debt. Potentially, this class of assets offers huge scope for Fed operations," he [Bernanke] said.
Berkeley’s Brad DeLong said it is time for Bernanke to act on this as the world lurches straight into 1931 and a Great Depression II. “The Federal Reserve needs to buy up every single European bond owned by every single American financial institution for cash,” he said.
The Fed could buy €2 trillion of EMU debt or more, intervening with crushing power. The credible threat of such action by the world’s paramount monetary force might alone bring Italian and Spanish yields back down below 5pc, before one bent nickel is even spent.
And yet another article saying the same thing:
http://www.aljazeera.com/indepth/opinion/2011/11/20111128143150223756.html
"Fortunately, the Fed has the tools needed to prevent this sort of meltdown. It can simply take the steps that the ECB has failed to do. First, and most importantly, it has to guarantee the sovereign debt of eurozone countries. The Fed simply has to commit to keep the interest rate yields on debt from rising above levels where it risks creating a self-perpetuating spiral of higher debt leading to higher interest rates, which in turn raises the deficit and debt."
Thursday, November 24, 2011
The Renminbi is no threat to the dollar
In contrast to popular perception, evidence from China suggests that the internationalization of the renminbi is stalling — and in many respects it has barely got off the ground.
In its latest monetary policy report, the People’s Bank of China revealed that the amount of cross-border trade settled in the renminbi fell in the third quarter, the first decline since China started using its own currency for imports and exports in June 2009.
Renminbi Threat to Dollar Could Be Stalling
In its latest monetary policy report, the People’s Bank of China revealed that the amount of cross-border trade settled in the renminbi fell in the third quarter, the first decline since China started using its own currency for imports and exports in June 2009.
Renminbi Threat to Dollar Could Be Stalling
GDP
According to the US Bureau of Economic Analysis, GDP at the end of the 3rd Quarter was as follows:
2009 13920.5
2010 14605.5
2011 15180.9
It doesn't project 3Q 2012, but at a 3.9% growth rate, it should be at 15773.0.
2009 13920.5
2010 14605.5
2011 15180.9
It doesn't project 3Q 2012, but at a 3.9% growth rate, it should be at 15773.0.
Tuesday, November 22, 2011
Monday, November 21, 2011
What happens in a crisis?
I keep using the words "crisis", "tipping point", "doomsday", etc. What exactly do I expect to happen?
First, the land will still be here obviously, as will the people, and something called the United States of America. But interest rates will soar to 10 or 20% or higher within a short period of time because no one will be willing to lend to the bankrupt US without a much higher return. Inflation will increase to at least 20% and could reach 50% or even 100% as the Fed goes wild. Commodity prices (gold, silver, copper) will soar, as will real estate and stocks. Bondholders and savers (and banks) will be screwed. Whoever is buying US bonds now (read: China) is an idiot.
Actually, this doesn't sound so bad. Bring it on!
First, the land will still be here obviously, as will the people, and something called the United States of America. But interest rates will soar to 10 or 20% or higher within a short period of time because no one will be willing to lend to the bankrupt US without a much higher return. Inflation will increase to at least 20% and could reach 50% or even 100% as the Fed goes wild. Commodity prices (gold, silver, copper) will soar, as will real estate and stocks. Bondholders and savers (and banks) will be screwed. Whoever is buying US bonds now (read: China) is an idiot.
Actually, this doesn't sound so bad. Bring it on!
Worst Case Scenario - 2019
I don't think this scenario is likely, but it certainly is possible. Revenue and GDP figures come from the CRFB projection. Social Security and Medicare come from the "high-cost" projections. Medicaid increases at a 8.3% rate, which comes from the trustee report. "Other" increases at 4%, which is less than Revenue and GDP increases.
Update 6/19/12: This is model J-6, and it is too pessimistic.
Sunday, November 20, 2011
Another Calculation - 2031
This is based partially on http://crfb.org/document/analysis-cbos-august-2011-baseline-and-update-crfb-realistic-baseline. It assumes that the deficit reduction committee is successful in cutting $1.2 trillion from the budget. It pushes the crisis point out to 2031, but the basic problem still exists: revenue increases at the same rate as GDP (4.5% here), but the entitlement spending increases at a rate greater than GDP (7% here).
CBO and OMB both flawed
I was trying to produce an even better model but have temporarily abandoned it. There are numerous small problems that exist, such as:
1. What is "net interest"? I assume it is interest paid, less receipts from the Federal Reserve, and so that number is in my model. But I can't even find good numbers on what net interest was in 2010. Was it 228, which is what I am using from the Treasury? That seems to be the number. But the CBO says it was 196 and OMB says it was 196. What about 2011? I have 266 from the Treasury, CBO says 221, and OMB says 205.
2. What is "Defense Spending"? In 2010, per the Treasury, "Defense-Military" outlays were 667 and in 2011 it was 678. Per the CBO, in 2010, "Defense" outlays were 714, and in 2011 were 712. Per the OMB, in 2010 "Security" outlays were 815, whereas "Security" funding levels for 2010 were 682.8 (including Defense of 530), and in 2011 "Security" outlays were 891, with "Security" funding of 714.
3. What is "Mandatory Spending"? Treasury doesn't use the term. The CBO says that "Mandatory spending" in 2010 was 1913. OMB says that outlays in "Mandatory programs" was 1954 in 2010.
4. What about "Social Security" spending? Treasury says the spending in 2010 was 696, CBO says it was 701, and OMB also says it was 701. But for "Medicare", in 2010, Treasury says it was 450, CBO says it was 520, OMB says it was 446.
In conclusion, I am convinced that the CBO and OMB numbers are both unreliable and would use them only for comparison purposes. I believe the Treasury numbers are very reliable.
I am going to continue to use my model for now, which is split into 5 categories: Social Security, Medicare, Medicaid, Interest, and Other.
1. What is "net interest"? I assume it is interest paid, less receipts from the Federal Reserve, and so that number is in my model. But I can't even find good numbers on what net interest was in 2010. Was it 228, which is what I am using from the Treasury? That seems to be the number. But the CBO says it was 196 and OMB says it was 196. What about 2011? I have 266 from the Treasury, CBO says 221, and OMB says 205.
2. What is "Defense Spending"? In 2010, per the Treasury, "Defense-Military" outlays were 667 and in 2011 it was 678. Per the CBO, in 2010, "Defense" outlays were 714, and in 2011 were 712. Per the OMB, in 2010 "Security" outlays were 815, whereas "Security" funding levels for 2010 were 682.8 (including Defense of 530), and in 2011 "Security" outlays were 891, with "Security" funding of 714.
3. What is "Mandatory Spending"? Treasury doesn't use the term. The CBO says that "Mandatory spending" in 2010 was 1913. OMB says that outlays in "Mandatory programs" was 1954 in 2010.
4. What about "Social Security" spending? Treasury says the spending in 2010 was 696, CBO says it was 701, and OMB also says it was 701. But for "Medicare", in 2010, Treasury says it was 450, CBO says it was 520, OMB says it was 446.
In conclusion, I am convinced that the CBO and OMB numbers are both unreliable and would use them only for comparison purposes. I believe the Treasury numbers are very reliable.
I am going to continue to use my model for now, which is split into 5 categories: Social Security, Medicare, Medicaid, Interest, and Other.
Saturday, November 19, 2011
US GDP
From: http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm
"Current-dollar GDP -- the market value of the nation's output of goods and services -- increased 5.0 percent, or $185.8 billion, in the third quarter to a level of $15,198.6 billion."
So the GDP number for 2011 should be revised to this number.
================
Update: This was later revised to $15176 bn.
"Current-dollar GDP -- the market value of the nation's output of goods and services -- increased 5.0 percent, or $185.8 billion, in the third quarter to a level of $15,198.6 billion."
So the GDP number for 2011 should be revised to this number.
================
Update: This was later revised to $15176 bn.
Belgium is not a real country
It should also be noted that Belgium, with a population of only 10 million, is 450 billion dollars in debt, with a debt/GDP ratio higher than Ireland, Portugal or Spain. Belgium should also be considered one of the PIIGS.
Friday, November 18, 2011
The Fed doesn't create inflation?
http://moslereconomics.com/2011/11/14/it-must-be-impossible-for-the-fed-to-create-inflation/
In conclusion, theory and evidence tell me it’s impossible for the Fed to create inflation, no matter how much it tries. The reason is because all the Fed does is shift dollars from one type of account to another, never changing the net financial assets held by the economy. Changing interest rates only shifts dollars between ’savers’ and ‘borrowers’ and QE only shifts dollars from securities accounts to reserve accounts. And so theory and evidence tells us not to expect much change in the macro economy from these primary Fed tools, making it impossible for the Fed to create inflation.
==========
My comment: The Fed is creating inflation, but it is being offset by deflating asset prices. The author should wait 5 years and still try to make the same argument.
============
Update: Here is another argument saying the same thing.
From: http://econviz.org/macroeconomic-balance-sheet-visualizer/
In conclusion, theory and evidence tell me it’s impossible for the Fed to create inflation, no matter how much it tries. The reason is because all the Fed does is shift dollars from one type of account to another, never changing the net financial assets held by the economy. Changing interest rates only shifts dollars between ’savers’ and ‘borrowers’ and QE only shifts dollars from securities accounts to reserve accounts. And so theory and evidence tells us not to expect much change in the macro economy from these primary Fed tools, making it impossible for the Fed to create inflation.
==========
My comment: The Fed is creating inflation, but it is being offset by deflating asset prices. The author should wait 5 years and still try to make the same argument.
============
Update: Here is another argument saying the same thing.
From: http://econviz.org/macroeconomic-balance-sheet-visualizer/
- Quantitative easing simply swaps one type of asset on private sector balance sheets (typically treasuries) for another type (deposits backed by bank reserves, or simply bank reserves if a bank did the selling.)
- QE effectively changes the duration mix of outstanding government liabilities toward more short term liabilities and less long term ones. As such, it is roughly equivalent to if the treasury had previously chosen to issue relatively more T-Bills (short duration) and less bonds (long duration).
- No sectors (or entities within sectors) see any change in balance sheet equity as a direct result of QE. Therefore, there is no meaningful increase in the private sector's purchasing power or propensity to spend. At the level of each individual household or firm who might sell to the Fed during QE, decisions regarding investment portfolio composition tend to be made independently from decisions about how much to spend versus hold in an investment portfolio — so a change in the portfolio mix (cash, bonds, stocks, etc) won't cause more spending. Also, treasuries are almost as liquid as "money" and anyone previously holding treasuries could have easily sold them to support any planned spending.
- The central bank balance sheet expands as it draws in assets from the private sector and creates new liabilities (reserves) to match.
- Modern Monetary Theorists point out that from a macroeconomic perspective, QE includes a deflationary impulse because is it replaces a higher yielding asset (treasuries) with a lower yielding asset (money), reducing the interest income paid to the private sector by the government! As such it is comparable to the removal of some fiscal stimulus, though the extent to which aggregate demand is impacted in each case could differ depending on targeting (i.e., those earning treasury bond income may have a different propensity to spend from the initial recipients of fiscal stimulus related spending.)
- Broad money and base money both increase when households do the selling (however, when banks are the ones deciding to sell treasuries, broad money does not increase). QE does not lead to loan-driven inflation now or in the future, as banks never lend out reserves or are reserve constrained, rather loans create deposits (see "Bank Loan" operation).
- QE is sometimes argued to lead to asset price inflation as the holders of now more numerous low yielding deposits and currency may bid up asset prices (stocks, commodities, real estate, etc) in a search for yield, but whether this leads to inflation in the real economy depends on the extent to which this induces a subsequent and ongoing increase in private sector demand for goods and services. The existence of a transmission mechanism from QE to sustained inflation in goods and services is highly questionable. Any psychology-driven increase in asset price valuation multiples is unlikely to be sustained, since real earnings underlying the assets are unlikely to grow as fast as expected by who assume QE directly stimulates the economy. For example, Japan has engaged in multiple rounds of quantitative easing since the early 2000s with no discernable impacts on the real economy and certainly no growth in inflation (Japan has moved in and out of mild deflation). Japan expert Richard Koo calls QE the "greatest monetary non-event."
- Ultimately, the private sector controls the size of the broad money supply as a consequence of its borrowing decisions and portfolio adjustment decisions. Some theory and evidence support the idea that the private sector can "undo" the increase in deposits that results from QE! See the post "A Visual Guide to Endogenous Money and the Failure of QE" and its predecessors for a detailed explanation.
Thursday, November 17, 2011
Germany joins the PIIGS
From: http://www.telegraph.co.uk/finance/financialcrisis/8897775/Asian-powers-spurn-German-debt-on-EMU-chaos.html
The question on everybody's mind in the debt markets is whether it is time to get out Germany. The European Central Bank has a €2 trillion balance sheet and if the eurozone slides into the abyss, Germany is going to be left holding the baby.
Jean-Claude Juncker, Eurogroup chief, fueled the fire by warning that Germany is no longer a sound credit with debt of 82pc of GDP. "I think the level of German debt is worrying. Germany has higher debts than Spain," he said.
Critics say Germany is falling between two stools. It has backed EMU rescues on a sufficient scale to endanger its own credit-worthiness, without committing the nuclear firepower needed to restore confidence and eliminate default risk in Spain and Italy. It would be hard to devise a more destructive policy.
The question on everybody's mind in the debt markets is whether it is time to get out Germany. The European Central Bank has a €2 trillion balance sheet and if the eurozone slides into the abyss, Germany is going to be left holding the baby.
Jean-Claude Juncker, Eurogroup chief, fueled the fire by warning that Germany is no longer a sound credit with debt of 82pc of GDP. "I think the level of German debt is worrying. Germany has higher debts than Spain," he said.
Critics say Germany is falling between two stools. It has backed EMU rescues on a sufficient scale to endanger its own credit-worthiness, without committing the nuclear firepower needed to restore confidence and eliminate default risk in Spain and Italy. It would be hard to devise a more destructive policy.
Wednesday, November 16, 2011
$15 trillion national debt
The total national debt just passed $15 trillion on 11/15/2011. It first passed $10 trillion on 9/30/2008, only a little more than 3 years ago.
I think a better measure is debt held by the public. It first exceeded $5 trillion on 3/1/2007 and $10 trillion on 8/31/2011. It will exceed $15 trillion by 9/30/2016.
I think a better measure is debt held by the public. It first exceeded $5 trillion on 3/1/2007 and $10 trillion on 8/31/2011. It will exceed $15 trillion by 9/30/2016.
Actual expenditures 2009-2011
Category-- 2009 2010 2011
Social Sec 660 _696 _720
Medicare 429 _450 _483
Medicaid 251 _273 _275
Source: http://www.cbo.gov/ftpdocs/125xx/doc12541/2011_Nov_MBR.pdf
Social Sec 660 _696 _720
Medicare 429 _450 _483
Medicaid 251 _273 _275
Source: http://www.cbo.gov/ftpdocs/125xx/doc12541/2011_Nov_MBR.pdf
Medicaid Projected Expenditures
2012 260
2013 281
2014 340
2015 379
2016 415
2017 446
2018 477
2019 513
A projection for 2020 was not given in this report, but it does state that "Medicaid is expected to grow about 8.3 percent per year on average", pointing to an estimate of 550 billion for 2020.
Source: http://www.cms.gov/ActuarialStudies/downloads/MedicaidReport2010.pdf,
pg. 31, Federal expenditures
The report doesn't make any long-term assumptions, so I think it should use the 8.3% growth rate until it reaches 5.0% of GDP and then cap it.
2013 281
2014 340
2015 379
2016 415
2017 446
2018 477
2019 513
A projection for 2020 was not given in this report, but it does state that "Medicaid is expected to grow about 8.3 percent per year on average", pointing to an estimate of 550 billion for 2020.
Source: http://www.cms.gov/ActuarialStudies/downloads/MedicaidReport2010.pdf,
pg. 31, Federal expenditures
The report doesn't make any long-term assumptions, so I think it should use the 8.3% growth rate until it reaches 5.0% of GDP and then cap it.
Medicare Projected Expentitures
2012 572
2013 607
2014 643
2015 676
2016 716
2017 760
2018 810
2019 865
2020 932
Source: http://www.cms.gov/ReportsTrustFunds/downloads/tr2011.pdf , pg. 51, Intermediate estimates.
After 2020, the projected expenditures are given as a percent of GDP as follows. Percents for dates between these would be interpolated.
2020 3.99%
2025 4.59%
2030 5.16%
2035 5.56%
2040 5.77%
2045 5.87%
2050 5.94%
2013 607
2014 643
2015 676
2016 716
2017 760
2018 810
2019 865
2020 932
Source: http://www.cms.gov/ReportsTrustFunds/downloads/tr2011.pdf , pg. 51, Intermediate estimates.
After 2020, the projected expenditures are given as a percent of GDP as follows. Percents for dates between these would be interpolated.
2020 3.99%
2025 4.59%
2030 5.16%
2035 5.56%
2040 5.77%
2045 5.87%
2050 5.94%
Tuesday, November 15, 2011
Social Security Projections
A more sophisticated model that has Social Security broken out should use these numbers for projections:
2012 760
2013 802
2014 849
2015 899
2016 952
2017 1010
2018 1073
2019 1146
2020 1226
From: http://www.ssa.gov/oact/tr/2011/tr2011.pdf, pg 50, Intermediate Projection.
After 2020, the projected expenditures are given as a percent of GDP as follows.
2020 7.02%
2025 7.66%
2030 8.15%
2035 8.40%
2040 8.43%
2045 8.36%
2050 8.28%
2012 760
2013 802
2014 849
2015 899
2016 952
2017 1010
2018 1073
2019 1146
2020 1226
From: http://www.ssa.gov/oact/tr/2011/tr2011.pdf, pg 50, Intermediate Projection.
After 2020, the projected expenditures are given as a percent of GDP as follows.
2020 7.02%
2025 7.66%
2030 8.15%
2035 8.40%
2040 8.43%
2045 8.36%
2050 8.28%
Details
Blogger sucks at doing tables, so here is a screen grab of details from my latest projection. It should be interesting to see how this changes over time.
Sunday, November 13, 2011
Latest Projection
This is similar to the last one with some adjustments. My assumptions:
1. The breaking point is when net public debt reaches 100% of GDP.
2. GDP is 24633 in 2021 and increases by 5% annually.
3. Revenue is 4923 in 2021 and increases by 5% annually. In other words, revenue remains constant at 20% of GDP.
4. Fed ownership of government bonds is 1569 in 2011 and will grow 5% thereafter. (In other words, I have already priced in future quantitative easing).
5. Outlays are split into 3 categories: a) Social Spending, which is 2670 in 2021 and will grow 6.6% thereafter; b) Interest, which is 5.3% of the previous years net public debt; 3) other spending, which is 1844 in 2011 and will increase 3% annually.
Under this scenario, the system will remain solvent until 2049. In that year GDP will be 96565 and net public debt will be 97404 (i.e. $97 trillion). Revenue is 20% of GDP, social spending is 16.55% of GDP (up from 9.89% in 2011), other spending is only 5.87% of GDP (down from 12.23% of GDP in 2011), interest is 4.98% of GDP (up from 1.76% in 2011), and the deficit is 7.42% of GDP.
The problem here is mostly social spending. I think only a 6.6% growth rate is optimistic. It is not possible to increase revenues or reduce other spending enough to compensate for this.
So in conclusion, while this projection seems more optimistic than earlier ones, it still seems like it is inevitable that a crisis will occur.
========
I guess a related question is how can the system possible last that long? Well, I am assuming 5% GDP growth. So if the spending were just to freeze at current rates then the problem would quickly cure itself. The problem is spending is increasing more that 5%/year. I am also assuming 5% Fed asset (money supply) growth. This eats up some of the deficit. I don't think this could increase much more without causing massive inflation.
========
Update 6/19/2012: This is model J-3. It seems too optimistic, assuming 5% growth in GDP annually.
1. The breaking point is when net public debt reaches 100% of GDP.
2. GDP is 24633 in 2021 and increases by 5% annually.
3. Revenue is 4923 in 2021 and increases by 5% annually. In other words, revenue remains constant at 20% of GDP.
4. Fed ownership of government bonds is 1569 in 2011 and will grow 5% thereafter. (In other words, I have already priced in future quantitative easing).
5. Outlays are split into 3 categories: a) Social Spending, which is 2670 in 2021 and will grow 6.6% thereafter; b) Interest, which is 5.3% of the previous years net public debt; 3) other spending, which is 1844 in 2011 and will increase 3% annually.
Under this scenario, the system will remain solvent until 2049. In that year GDP will be 96565 and net public debt will be 97404 (i.e. $97 trillion). Revenue is 20% of GDP, social spending is 16.55% of GDP (up from 9.89% in 2011), other spending is only 5.87% of GDP (down from 12.23% of GDP in 2011), interest is 4.98% of GDP (up from 1.76% in 2011), and the deficit is 7.42% of GDP.
The problem here is mostly social spending. I think only a 6.6% growth rate is optimistic. It is not possible to increase revenues or reduce other spending enough to compensate for this.
So in conclusion, while this projection seems more optimistic than earlier ones, it still seems like it is inevitable that a crisis will occur.
========
I guess a related question is how can the system possible last that long? Well, I am assuming 5% GDP growth. So if the spending were just to freeze at current rates then the problem would quickly cure itself. The problem is spending is increasing more that 5%/year. I am also assuming 5% Fed asset (money supply) growth. This eats up some of the deficit. I don't think this could increase much more without causing massive inflation.
========
Update 6/19/2012: This is model J-3. It seems too optimistic, assuming 5% growth in GDP annually.
Saturday, November 12, 2011
The Trillion Dollar Coin
From: http://www.creditwritedowns.com/2011/07/trillion-dollar-coin.html
"The coin seignorage idea has really caught on – not just in the blogosphere, but in the mainstream media as well. You have Brad DeLong, Matt Yglesias, Tyler Cowen and a lot of others talking up ‘The Coin’. In the mainstream media, the Economist, CNN, The New Republic and many others.
Just so you know what I am talking about, the idea is an end-run around the debt ceiling and it works like this:
The Treasury mints a $1 trillion coin, or whatever amount is desired.
The Treasury deposits the coin into the Treasury’s account at the Fed.
The Treasury buys back bonds
The retirement of bonds is an asset swap, no different from QE2
The increase in reserve balances is not inflationary, as Credit Easing 1.0, QE 1.0, and QE 2.0 already have shown.
These operations by the Treasury create no new net financial assets for the non-government sector
The debt ceiling crisis is averted
Here’s what Ryan Avent of the Economist says about The Coin:
As the date on which Treasury runs flat out of money grows nearer, various harebrained ideas to workaround the statutory limit on borrowing and keep paying the bills have been getting more attention. This one, one of my favourites, seems like it just might work
Those MMTers are not so crazy after all."
===================================
My comments: I want to analyze this. Instead of minting a coin, how about just issuing a special-purpose $1 trillion bond that pays 0.05% interest. Then the Fed would create $1 trillion in new electronic FRNs and buy the bond. Then the treasury would use the money to retire higher-interest bonds that the Fed owns.
Isn't this the same effect? What is the purpose other than to lower the interest paid. And since the Fed already returns interest received to the Treasury, this wouldn't have any effect at all.
Whoever is promoting this hasn't thought it through.
Alternatively, the Treasury could just use the cash to finance the deficit. Printing money out of thin air and just spending it. Of course this would lead almost directly to hyperinflation.
"The coin seignorage idea has really caught on – not just in the blogosphere, but in the mainstream media as well. You have Brad DeLong, Matt Yglesias, Tyler Cowen and a lot of others talking up ‘The Coin’. In the mainstream media, the Economist, CNN, The New Republic and many others.
Just so you know what I am talking about, the idea is an end-run around the debt ceiling and it works like this:
The Treasury mints a $1 trillion coin, or whatever amount is desired.
The Treasury deposits the coin into the Treasury’s account at the Fed.
The Treasury buys back bonds
The retirement of bonds is an asset swap, no different from QE2
The increase in reserve balances is not inflationary, as Credit Easing 1.0, QE 1.0, and QE 2.0 already have shown.
These operations by the Treasury create no new net financial assets for the non-government sector
The debt ceiling crisis is averted
Here’s what Ryan Avent of the Economist says about The Coin:
As the date on which Treasury runs flat out of money grows nearer, various harebrained ideas to workaround the statutory limit on borrowing and keep paying the bills have been getting more attention. This one, one of my favourites, seems like it just might work
Those MMTers are not so crazy after all."
===================================
My comments: I want to analyze this. Instead of minting a coin, how about just issuing a special-purpose $1 trillion bond that pays 0.05% interest. Then the Fed would create $1 trillion in new electronic FRNs and buy the bond. Then the treasury would use the money to retire higher-interest bonds that the Fed owns.
Isn't this the same effect? What is the purpose other than to lower the interest paid. And since the Fed already returns interest received to the Treasury, this wouldn't have any effect at all.
Whoever is promoting this hasn't thought it through.
Alternatively, the Treasury could just use the cash to finance the deficit. Printing money out of thin air and just spending it. Of course this would lead almost directly to hyperinflation.
Friday, November 11, 2011
Tuesday, November 8, 2011
Monetary base exploding in Switzerland
If I am reading this right, the Swiss monetary base was 77 billion CHF at the end of July 2011. At the end of September, only 2 months later, it was at 253 billion CHF. The increase in liabilities was mostly in sight deposits, and the increase of assets was mostly in foreign currency investments, probably mostly European government debt, excluding Greece of course.
The primary purpose of this is to weaken the franc to make the Swiss economy more competitive, but it also is a bailout of Europe, which needs all the help it can get.
The primary purpose of this is to weaken the franc to make the Swiss economy more competitive, but it also is a bailout of Europe, which needs all the help it can get.
Interest costs up 17%
"Net Interest: Spending for net interest on the public debt rose by $38 billion, or almost 17 percent, in 2011, primarily because of growth in that debt over the past year."
-- http://cboblog.cbo.gov/?p=2998
This was after a 13% increase in 2010.
-- http://cboblog.cbo.gov/?p=2998
This was after a 13% increase in 2010.
Sunday, November 6, 2011
And again
This is like a game to me. Here is another simulation, starting with OMB budget numbers, and my assumptions.
1. GDP is 24633 in 2021 and will grow 4% thereafter.
2. Revenue is 4923 in 2021 and will grow 5% thereafter.
3. Outlays are 5697 in 2021 and will grow 6% thereafter.
4. Fed ownership of government bonds is 1569 in 2011 and will grow 5% thereafter.
The crisis point here is in 2038, when GDP is 47983 and net public debt is 48276.
What if GDP grows by 5% and outlays grow by 5% per year after 2021? Then it is sustainable infinitely.
Update 6/19/2012: This is model J-2.
1. GDP is 24633 in 2021 and will grow 4% thereafter.
2. Revenue is 4923 in 2021 and will grow 5% thereafter.
3. Outlays are 5697 in 2021 and will grow 6% thereafter.
4. Fed ownership of government bonds is 1569 in 2011 and will grow 5% thereafter.
The crisis point here is in 2038, when GDP is 47983 and net public debt is 48276.
What if GDP grows by 5% and outlays grow by 5% per year after 2021? Then it is sustainable infinitely.
Update 6/19/2012: This is model J-2.
And yet even another projection
I don't claim to be able to project the future. But there might be a grain of truth here somewhere. So here is my latest.
Assumptions:
1. A crisis point will be reached when debt held by the public, less debt held by the Federal Reserve, ("net public debt") exceeds 100% of GDP.
2. GDP figures are taken from CBO projections through 2021 (when the number is 23830) and then it will grow by 4% thereafter.
3. The debt held by the public will grow at 9%/year, starting at 10127 in 2011.
4. The debt held by the Fed grows at 5%/year, starting at 1569 in 2011.
Using these assumptions, the crisis point will be reached in 2024 when GDP will be 26806, and net public debt is 28089.
Update: This is model J-1. Model J is the theory that debt held by the public, less debt held by the Federal Reserve, cannot exceed 100% of GDP.
============
Update (10/28/12): This is flawed, for two reasons. A 9% growth rate in the debt may be too high, and it is too simplistic just to assume a given growth rate. This should follow budget projections for at least 10 years. Second, the 100% number isn't necessarily a threshold, and the number is probably higher, at least 125%.
Assumptions:
1. A crisis point will be reached when debt held by the public, less debt held by the Federal Reserve, ("net public debt") exceeds 100% of GDP.
2. GDP figures are taken from CBO projections through 2021 (when the number is 23830) and then it will grow by 4% thereafter.
3. The debt held by the public will grow at 9%/year, starting at 10127 in 2011.
4. The debt held by the Fed grows at 5%/year, starting at 1569 in 2011.
Using these assumptions, the crisis point will be reached in 2024 when GDP will be 26806, and net public debt is 28089.
Update: This is model J-1. Model J is the theory that debt held by the public, less debt held by the Federal Reserve, cannot exceed 100% of GDP.
============
Update (10/28/12): This is flawed, for two reasons. A 9% growth rate in the debt may be too high, and it is too simplistic just to assume a given growth rate. This should follow budget projections for at least 10 years. Second, the 100% number isn't necessarily a threshold, and the number is probably higher, at least 125%.
10% chance of total meltdown now
From: http://www.minyanville.com/businessmarkets/articles/todd-harrison-todd-harrison-minyanville-todd/11/4/2011/id/37761
“There’s a real danger of a disorderly default,” billionaire investor George Soros said in a speech in Budapest. Without support for Greek lenders, “you’re liable to have a run on the banks in other countries as well. That’s the danger of a meltdown.”
-- Bloomberg, November 4
"What's yet unclear is what happens between now and the back half of this decade. ... The most intuitive answer is a whole lot of debt destruction and/or reorganization—that, in my eyes, is the only true medicine—but that can arrive in many ways, shapes and forms. It can be orderly or disorderly; it can be done in concert, or it may lead to war.
Let's look at it this way—let's say that we assume calmer heads prevail, as a total meltdown is in nobody's best interest. Let's say, in the spirit of handicapping, we put a 20% probability that this thing unraveling. Even 15%. OK, maybe 10%.
That assumes a 1 in 10 chance that self-serving agendas emerge, political will evaporates or social mood erupts—or worse. A 1-in-10 chance. Now, factor that (or whatever your odds you choose to use) into your forward risk profile, and allow for a margin for error."
“There’s a real danger of a disorderly default,” billionaire investor George Soros said in a speech in Budapest. Without support for Greek lenders, “you’re liable to have a run on the banks in other countries as well. That’s the danger of a meltdown.”
-- Bloomberg, November 4
"What's yet unclear is what happens between now and the back half of this decade. ... The most intuitive answer is a whole lot of debt destruction and/or reorganization—that, in my eyes, is the only true medicine—but that can arrive in many ways, shapes and forms. It can be orderly or disorderly; it can be done in concert, or it may lead to war.
Let's look at it this way—let's say that we assume calmer heads prevail, as a total meltdown is in nobody's best interest. Let's say, in the spirit of handicapping, we put a 20% probability that this thing unraveling. Even 15%. OK, maybe 10%.
That assumes a 1 in 10 chance that self-serving agendas emerge, political will evaporates or social mood erupts—or worse. A 1-in-10 chance. Now, factor that (or whatever your odds you choose to use) into your forward risk profile, and allow for a margin for error."
Should bonds owned by the Fed be subtracted from the national debt?
This is an interesting question I have discussed before, although I stated it differently - that Fed assets should be subtracted from the national debt. Wouldn't this possibly lead to hyperinflation? Yes, but the original question was is there a point when the national debt becomes so big it reaches a crisis point.
Just to be clear, here are the numbers:
1. Debt held by the public (from the Treasury Dept) is currently $10.261 trillion.
2. U.S. Treasury securities - Notes and bonds, nominal held by the Federal Reserve, is currently $1.570 trillion.
3. The US GDP is currently $14.582 trillion (per the World Bank).
Using these number, the debt ratio is 59.6%.
If my latest theory is correct, then the maximum sustainable ratio is 165%. When will the US reach this point? That is a question for later, but it will be later than my previous projection of 2025, so I will say 2026.
Update 6/19/2011: This is model H-2. Model H is the theory that debt held by the public, less debt held by the Federal Reserve, cannot exceed 165% of GDP.
Just to be clear, here are the numbers:
1. Debt held by the public (from the Treasury Dept) is currently $10.261 trillion.
2. U.S. Treasury securities - Notes and bonds, nominal held by the Federal Reserve, is currently $1.570 trillion.
3. The US GDP is currently $14.582 trillion (per the World Bank).
Using these number, the debt ratio is 59.6%.
If my latest theory is correct, then the maximum sustainable ratio is 165%. When will the US reach this point? That is a question for later, but it will be later than my previous projection of 2025, so I will say 2026.
Update 6/19/2011: This is model H-2. Model H is the theory that debt held by the public, less debt held by the Federal Reserve, cannot exceed 165% of GDP.
A modest proposal
How about a bailout of the people?
Here is my proposal: have the Treasury issue $2 trillion in a special series of bonds that pay 0.25% interest. Have the Fed buy this with newly created dollars. And then give everyone over 18 a check for $10,000 (assuming there are 200 million people). The recession would be over.
Here is my proposal: have the Treasury issue $2 trillion in a special series of bonds that pay 0.25% interest. Have the Fed buy this with newly created dollars. And then give everyone over 18 a check for $10,000 (assuming there are 200 million people). The recession would be over.
Saturday, November 5, 2011
Railguns
"Navy scientists with the Office of Naval Research (ONR) hit a new milestone, successfully firing their electromagnetic railgun for the 1,000th time as the state-of-the-art weapon edges closer to real world deployment.
A theoretical dream for decades, the railgun is unlike any other weapon used in warfare. And though still in testing, it's quite real, as the U.S. Navy proved in a record-setting test Monday, Oct. 31, in Dahlgren, Va.
Rather than relying on a explosion to fire a projectile, it uses an electomagnetic current to accelerate a non-explosive bullet at several times the speed of sound. The conductive projectile zips along a set of electrically charged parallel rails and out of the barrel at speeds up to Mach 7."
Read more: http://www.foxnews.com/scitech/2011/11/02/us-navys-futuristic-railgun-passes-projectile-milestone/?intcmp=obnetwork#ixzz1crKNUJgQ
A theoretical dream for decades, the railgun is unlike any other weapon used in warfare. And though still in testing, it's quite real, as the U.S. Navy proved in a record-setting test Monday, Oct. 31, in Dahlgren, Va.
Rather than relying on a explosion to fire a projectile, it uses an electomagnetic current to accelerate a non-explosive bullet at several times the speed of sound. The conductive projectile zips along a set of electrically charged parallel rails and out of the barrel at speeds up to Mach 7."
Read more: http://www.foxnews.com/scitech/2011/11/02/us-navys-futuristic-railgun-passes-projectile-milestone/?intcmp=obnetwork#ixzz1crKNUJgQ
Is a systemic collapse starting to happen now?
I started this blog because I was worried about the national debt skyrocketing into hyperspace. My current thought is that we have until about 2025 before that will happen.
What I am worried about now is independent of that, which is that the world economy, based on debt, is starting to collapse. That we are entering a depression. This started to happen in September 2008 with the collapse of Lehman Brothers. But the problems that led up to September 2008, namely too much debt, still exist. The whole world is entering a liquidity/insolvency crisis and it will be cash & carry from here on out.
=====================
Read this comment from http://www.zerohedge.com/news/cme-goes-margin-defcon-1-makes-maintenance-margin-equal-initial-everything:
"Every dollar owed relies on another borrower to borrow. This is the problem in the face of aggregate contraction. The issue we face as plebes is that the BANKS are the sole conduit of money into the economy. So, when the economy grew, the banks prospered. As the Bernank prints, the banks prosper. This is the point of the deflationists, credit becomes artificially scarce not because of individual borrowers' inability to repay but the fact that there don't exist the MORE borrowers in the future who will have to borrow the interest owed. It's a systemic problem. It's that proverbial someone else, the lack of growth, that prevents the system from functioning.
So, everyone has to repay, everyone has to put everything up front, everything real and in existence now trades at a premium. The system can't grow to pay today's interest, so nobody will lend even if the individual interest or venture lent to would be viable. The system in a state of contraction makes the credit growth necessary for a compounding interest system untenable, therefore lending ceases.
Today's principal P becomes tomorrow's principal P + interest I. The system necessarily requires someone to borrow (request the creation of money) more at every future point time T+1. It always has to grow. There always must be more credit created. A loan today can't be created, exist, be viable, be repaid, without that."
=================
To paraphrase the anonymous commenter, our economic system requires continuous growth in order to pay the compounding interest. When this growth stops, lending stops, and the whole system locks up, like an engine without oil.
The only way to temporarily stop this is another bailout of the banks and/or more quantitative easing. The only permanent solution is to allow a depression and widespread repudiation and default.
What I am worried about now is independent of that, which is that the world economy, based on debt, is starting to collapse. That we are entering a depression. This started to happen in September 2008 with the collapse of Lehman Brothers. But the problems that led up to September 2008, namely too much debt, still exist. The whole world is entering a liquidity/insolvency crisis and it will be cash & carry from here on out.
=====================
Read this comment from http://www.zerohedge.com/news/cme-goes-margin-defcon-1-makes-maintenance-margin-equal-initial-everything:
"Every dollar owed relies on another borrower to borrow. This is the problem in the face of aggregate contraction. The issue we face as plebes is that the BANKS are the sole conduit of money into the economy. So, when the economy grew, the banks prospered. As the Bernank prints, the banks prosper. This is the point of the deflationists, credit becomes artificially scarce not because of individual borrowers' inability to repay but the fact that there don't exist the MORE borrowers in the future who will have to borrow the interest owed. It's a systemic problem. It's that proverbial someone else, the lack of growth, that prevents the system from functioning.
So, everyone has to repay, everyone has to put everything up front, everything real and in existence now trades at a premium. The system can't grow to pay today's interest, so nobody will lend even if the individual interest or venture lent to would be viable. The system in a state of contraction makes the credit growth necessary for a compounding interest system untenable, therefore lending ceases.
Today's principal P becomes tomorrow's principal P + interest I. The system necessarily requires someone to borrow (request the creation of money) more at every future point time T+1. It always has to grow. There always must be more credit created. A loan today can't be created, exist, be viable, be repaid, without that."
=================
To paraphrase the anonymous commenter, our economic system requires continuous growth in order to pay the compounding interest. When this growth stops, lending stops, and the whole system locks up, like an engine without oil.
The only way to temporarily stop this is another bailout of the banks and/or more quantitative easing. The only permanent solution is to allow a depression and widespread repudiation and default.
Friday, November 4, 2011
India's new cities
"India sets out to build 24 new, industrial cities along a planned dedicated freight corridor from the political capital, New Delhi, to the financial capital, Mumbai priced at a cool $90 billion." (From: http://blogs.reuters.com/india/2011/10/31/navigating-the-obstacle-course-of-india%e2%80%99s-simcities/).
A sudden fiscal crisis
"Growing debt also would increase the probability of a sudden fiscal crisis, during which investors would lose confidence in the government's ability to manage its budget and the government would thereby lose its ability to borrow at affordable rates. Such a crisis would confront policymakers with extremely difficult choices. To restore investors' confidence, policymakers would probably need to enact spending cuts or tax increases more drastic and painful than those that would have been necessary had the adjustments come sooner."
This didn't come from some alarmist website it came from the CBO.
This didn't come from some alarmist website it came from the CBO.
Public debt is not debt - it is an asset
I just ran across a post from another confused individual who believes that government debt is a good thing.
I'm not even going to bother commenting on this right now, it makes the head hurt.
"Isn’t it true that in actuality, the US doesn’t, in fact “borrow’? It spends or trades? And if that is the case, doesn’t that just blow the deficit hawks out of the water?
Technically, the US borrows because it issues “debt instruments,” which are bought at auctions in return for already issued US Dollars. It issues debt instruments, not because it “needs” money in an objective sense; but because Congress requires that the Treasury issue debt instruments whenever the Government deficit spends. Since that national debt is just the value of the outstanding debt instruments. It’s clear that the operative cause of our national debt is this Congressional requirement, which is a hangover from gold standard days.
Those who bother to try to justify debt issuance (most just accept it as the way things are), do so by saying that if we didn’t issue debt in order to withdraw USD from circulation, the result would be inflation, because the new money created by debt-free Government spending would then flood the economy creating inflation according to the dictates of the Quantity Theory of Money. However, Keynes showed in the 30s that the Quantity Theory of Money doesn’t apply to situations where 1) there is less than full employment and 2) the velocity of money is varying through time — both conditions which apply right now.
--http://my.firedoglake.com/letsgetitdone/2011/03/27/is-the-debt-held-by-the-public-really-debt/
I'm not even going to bother commenting on this right now, it makes the head hurt.
Thursday, November 3, 2011
Guessing the Trigger Point for a US Debt Crisis
See: Guessing the Trigger Point for a US Debt Crisis
The author looks at 3 numbers in determining whether a debt crisis is likely.
First, the projected debt/GDP ratio. Using only the debt held by the public, this ratio is currently about 67%
Second, the Low-Confidence Target. This is the maximum ratio of debt to GDP that a government can incur and still have reasonable interest rates. I think that the US is in a different category than most countries because of its reserve currency status, but there still are limits. For most countries, a 90% ratio would be the limit, but for the US, it should be higher, say 125%. (This is the ratio of debt held by the public to GDP).
Third is the Pain Threshold. This is the maximum amount of budget adjustments that a country can incur over the next 5 years, as a percent of GDP. 40% seems a reasonable number.
So if these assumptions are reasonable, a debt crisis is likely to occur if the debt held by the public exceeds 165% of GDP. This point is likely to occur somewhere around 2025, which is now my latest prediction for a crisis.
Conclusion: "Scanning the tables in the previous section, it would appear to be quite likely that the United States will experience a debt crisis within the next two decades, unless the path for fiscal policy changes from what is projected by the Congressional Budget Office."
Update 6/19/2012: Yet another theory. Call it model H-1.
The author looks at 3 numbers in determining whether a debt crisis is likely.
First, the projected debt/GDP ratio. Using only the debt held by the public, this ratio is currently about 67%
Second, the Low-Confidence Target. This is the maximum ratio of debt to GDP that a government can incur and still have reasonable interest rates. I think that the US is in a different category than most countries because of its reserve currency status, but there still are limits. For most countries, a 90% ratio would be the limit, but for the US, it should be higher, say 125%. (This is the ratio of debt held by the public to GDP).
Third is the Pain Threshold. This is the maximum amount of budget adjustments that a country can incur over the next 5 years, as a percent of GDP. 40% seems a reasonable number.
So if these assumptions are reasonable, a debt crisis is likely to occur if the debt held by the public exceeds 165% of GDP. This point is likely to occur somewhere around 2025, which is now my latest prediction for a crisis.
Conclusion: "Scanning the tables in the previous section, it would appear to be quite likely that the United States will experience a debt crisis within the next two decades, unless the path for fiscal policy changes from what is projected by the Congressional Budget Office."
Update 6/19/2012: Yet another theory. Call it model H-1.
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