"It is the scandal of which we no longer speak. Like a mad aunt in the attic, the problem is not going away, indeed it can only get worse, yet we’re encouraged to pretend that the embarrassment doesn’t exist. ... I’m referring, of course, to the obscenity that is the United Kingdom’s ballooning personal debt. It stands at £1.5 trillion, a little more than the country’s annual GDP, our national output. ... £1,500,000,000,000 is the amount owed by individuals in the form of mortgages, overdrafts, loans and on credit cards. ... . It is perilously high, but indicates only where we are, not the direction of travel. The full horror of what is happening to household borrowing can be found tucked away on the Office for Budget Responsibility’s website. The numbers are shocking – they point to another looming crisis – which, perhaps, explains why no one at Westminster is willing to highlight them.
According to the OBR, UK personal debt will grow by nearly 50 per cent between now and the end of this parliament. Come 2015, it is forecast to reach £2.12 trillion pounds. How can this be right? The average British adult already owes £29,500, about 123 per cent of average earnings. I thought we were meant to be getting a grip, not letting rip."
From http://www.telegraph.co.uk/finance/comment/jeffrandall/8859082/The-debt-trap-time-bomb.html
Monday, October 31, 2011
Sunday, October 30, 2011
Monopoly Money, Series Three
This is a more creative series, especially with the hundred million bill. The ten million bill is modified from Zimbabwe.
Monopoly Money, Series Two
As an art project, I used Paint to create higher currency bills. Each of these is flawed, and the size isn't consistent with the previous series. But enjoy
Monopoly Money, Series One
I am fascinated with the game of Monopoly. It could use some tweaks to make it more realistic. One of the things that make it interesting is the money. So in tribute, sort of as an art project is a scan of the money. Here is Series One, a scan of the money from the game. (I converted this to make is smaller, and somehow the sizes changed slightly. But it should fit on a 8.5 x 11 sheet of paper and be roughly the same size as the original).
Monday, October 24, 2011
Are US taxpayers on the hook for European bank failures?
First read this story: http://dailybail.com/home/holy-bailout-federal-reserve-now-backstopping-75-trillion-of.html
Now read this: http://dailybail.com/home/william-black-not-with-a-bang-but-a-whimper-bank-of-americas.html
We are about to watch dominoes fall down in slow motion. First will be defaults by Greece. Then other countries will default, probably including Italy. Then the French, German, British, Dutch and Belgian banks that bought these bonds will fail.
But it doesn't end there. These banks bought credit default swaps from Bank of America and JPMorganChase. These two banks have more than $150 trillion of derivatives outstanding. These banks are insured by the the FDIC. Of course, the $150 trillion is notional value and the American banks probably are really only at risk of a fraction of that amount. But what if they are on the hook for 10%, or $15 trillion. They can't afford to pay that, so the FDIC and Fed will have to step in. When AIG was nationalized in 2008, the government took over more than $100 billion in liabilities. This is like AIG on steroids.
Now read this: http://dailybail.com/home/william-black-not-with-a-bang-but-a-whimper-bank-of-americas.html
We are about to watch dominoes fall down in slow motion. First will be defaults by Greece. Then other countries will default, probably including Italy. Then the French, German, British, Dutch and Belgian banks that bought these bonds will fail.
But it doesn't end there. These banks bought credit default swaps from Bank of America and JPMorganChase. These two banks have more than $150 trillion of derivatives outstanding. These banks are insured by the the FDIC. Of course, the $150 trillion is notional value and the American banks probably are really only at risk of a fraction of that amount. But what if they are on the hook for 10%, or $15 trillion. They can't afford to pay that, so the FDIC and Fed will have to step in. When AIG was nationalized in 2008, the government took over more than $100 billion in liabilities. This is like AIG on steroids.
Sunday, October 23, 2011
World power swings back to America
From: http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/8844646/World-power-swings-back-to-America.html
"The US was the single largest contributor to global oil supply growth last year, with a net 395,000 barrels per day (b/d)," said Francisco Blanch from Bank of America, comparing the Dakota fields to a new North Sea.
Total US shale output is "set to expand dramatically" as fresh sources come on stream, possibly reaching 5.5m b/d by mid-decade. This is a tenfold rise since 2009. The US already meets 72pc of its own oil needs, up from around 50pc a decade ago.
...
Meanwhile, the China-US seesaw is about to swing the other way. Offshoring is out, 're-inshoring' is the new fashion.
"Made in America, Again" - a report this month by Boston Consulting Group - said Chinese wage inflation running at 16pc a year for a decade has closed much of the cost gap. China is no longer the "default location" for cheap plants supplying the US.
...
As Philadelphia Fed chief Sandra Pianalto said last week, US manufacturing is "very competitive" at the current dollar exchange rate. Whether intended or not, the Fed's zero rates and $2.3 trillion printing blitz have brought matters to an abrupt head for China.
Fed actions confronted Beijing with a Morton's Fork of ugly choices: revalue the yuan, or hang onto the mercantilist dollar peg and import a US monetary policy that is far too loose for a red-hot economy at the top of the cycle. Either choice erodes China's wage advantage. The Communist Party chose inflation.
...
Yet America retains a pack of trump cards, and not just in sixteen of the world’s top twenty universities.
It is almost the only economic power with a fertility rate above 2.0 - and therefore the ability to outgrow debt - in sharp contrast to the demographic decay awaiting Japan, China, Korea, Germany, Italy, and Russia.
Europe's EMU soap opera has shown why it matters that America is a genuine nation, forged by shared language and the ancestral chords of memory over two centuries, with institutions that ultimately work and a real central bank able to back-stop the system.
The 21st Century may be American after all, just like the last.
"The US was the single largest contributor to global oil supply growth last year, with a net 395,000 barrels per day (b/d)," said Francisco Blanch from Bank of America, comparing the Dakota fields to a new North Sea.
Total US shale output is "set to expand dramatically" as fresh sources come on stream, possibly reaching 5.5m b/d by mid-decade. This is a tenfold rise since 2009. The US already meets 72pc of its own oil needs, up from around 50pc a decade ago.
...
Meanwhile, the China-US seesaw is about to swing the other way. Offshoring is out, 're-inshoring' is the new fashion.
"Made in America, Again" - a report this month by Boston Consulting Group - said Chinese wage inflation running at 16pc a year for a decade has closed much of the cost gap. China is no longer the "default location" for cheap plants supplying the US.
...
As Philadelphia Fed chief Sandra Pianalto said last week, US manufacturing is "very competitive" at the current dollar exchange rate. Whether intended or not, the Fed's zero rates and $2.3 trillion printing blitz have brought matters to an abrupt head for China.
Fed actions confronted Beijing with a Morton's Fork of ugly choices: revalue the yuan, or hang onto the mercantilist dollar peg and import a US monetary policy that is far too loose for a red-hot economy at the top of the cycle. Either choice erodes China's wage advantage. The Communist Party chose inflation.
...
Yet America retains a pack of trump cards, and not just in sixteen of the world’s top twenty universities.
It is almost the only economic power with a fertility rate above 2.0 - and therefore the ability to outgrow debt - in sharp contrast to the demographic decay awaiting Japan, China, Korea, Germany, Italy, and Russia.
Europe's EMU soap opera has shown why it matters that America is a genuine nation, forged by shared language and the ancestral chords of memory over two centuries, with institutions that ultimately work and a real central bank able to back-stop the system.
The 21st Century may be American after all, just like the last.
Don't ignore the Quadrillion dollar elephant in the room
This is an old post I originally posted somewhere else:
I don't understand the post below but the word "Quadrillion" sounds like a big number: "they are all missing the Quadrillion Playing Submerged Elephant in the Room! This elephant has spawned Eight Bubbles that are collapsing simultaneously as another Giant Bubble -- Government Debt -- is inflated to take away the full buffetting of their simultaneous burst! It is worth noting that the trans-national play of derivatives has grown from USD 1.144 Quadrillion to USD 1.405 Quadrillion, ie, +22% worldwide." http://www.intent.com/blog/2009/04/24/quadrillion-playing-submerged-elephant-room
Update: Here is another post that uses the word quadrillion: "Last year DTCC settled $1.88 quadrillion in securities transactions across multiple asset classes. We essentially turnover the equivalent of the U.S. GDP every three days." http://zerohedge.blogspot.com/2009/06/biggest-financial-company-you-have.html
The Japanese national debt is almost 1 quadrillion yen:
http://www.yomiuri.co.jp/dy/national/T111021004576.htm
I don't understand the post below but the word "Quadrillion" sounds like a big number: "they are all missing the Quadrillion Playing Submerged Elephant in the Room! This elephant has spawned Eight Bubbles that are collapsing simultaneously as another Giant Bubble -- Government Debt -- is inflated to take away the full buffetting of their simultaneous burst! It is worth noting that the trans-national play of derivatives has grown from USD 1.144 Quadrillion to USD 1.405 Quadrillion, ie, +22% worldwide." http://www.intent.com/blog/2009/04/24/quadrillion-playing-submerged-elephant-room
Update: Here is another post that uses the word quadrillion: "Last year DTCC settled $1.88 quadrillion in securities transactions across multiple asset classes. We essentially turnover the equivalent of the U.S. GDP every three days." http://zerohedge.blogspot.com/2009/06/biggest-financial-company-you-have.html
The Japanese national debt is almost 1 quadrillion yen:
http://www.yomiuri.co.jp/dy/national/T111021004576.htm
Saturday, October 22, 2011
The Economic Confidence Model
The Economic Confidence Model is a theory by Martin Armstrong, that uses a 8.6 year business cycle, that is divided into 4.3 waves.
According to this theory, the last high point was on 2/24/07, and the last low was on 6/14/2011, with the next high on 10/1/2015.
The stock market hit a high on 10/9/2007 when the Dow hit 14164.
The stock market does seem to have hit a low on 10/3/2011, when the Dow closed at 10655, so this model is forecasting a boom.
Maybe the model is about 6 months off. Anyways, interesting theory, just don't use it to predict exact market timing.
According to this theory, the last high point was on 2/24/07, and the last low was on 6/14/2011, with the next high on 10/1/2015.
The stock market hit a high on 10/9/2007 when the Dow hit 14164.
The stock market does seem to have hit a low on 10/3/2011, when the Dow closed at 10655, so this model is forecasting a boom.
Maybe the model is about 6 months off. Anyways, interesting theory, just don't use it to predict exact market timing.
Long-term interest rate projections
Here are the only numbers I can find for long-term interest rates, from the OMB.
10-year Treasury notes:
2011 3.0%
2012 3.6%
2013 4.2%
2014 4.6%
2015 5.0%
2016 5.2%
2017 5.3%
2018 5.3%
2019 5.3%
2020 5.3%
2021 5.3%
If the debt is 30 trillion in 2021, then 5.3% interest would be 1.59 trillion per year.
10-year Treasury notes:
2011 3.0%
2012 3.6%
2013 4.2%
2014 4.6%
2015 5.0%
2016 5.2%
2017 5.3%
2018 5.3%
2019 5.3%
2020 5.3%
2021 5.3%
If the debt is 30 trillion in 2021, then 5.3% interest would be 1.59 trillion per year.
China will own the moon
From: http://www.space.com/13331-china-space-race-moon-ownership-bigelow-ispcs.html
"Americans are still basking in the lunar glory from 40 years ago," [Robert] Bigelow said. "But we don’t own one square foot of the damn place. NASA is a shadow of the space agency it once was in the 1960s and 1970s."
In contrast, he argued, China has the motivation and ability to win the next space race and claim ownership of much of the moon. Bigelow argued that international law would allow a nation to make such a claim, especially if it were able to enforce it through continuous human lunar presence.
Owning the moon would be a windfall both financially and for international prestige, he said. Not only does it offer a jumping off point for further exploration of the solar system, but it also contains vast stores of valuable resources such as water and helium-3, a possible fuel for nuclear fusion.
Moreover, the symbolic and global psychological impact would be huge, Bigelow said. "I think nothing else China could possibly do in the next 15 years would cause as great a benefit for China."
In addition to China's growing technological prowess, the country has the cash, the lack of debt and the national will to become the owner of the moon, Bigelow argued. He predicted China could claim ownership of vast swaths of lunar territory by 2022 to 2026.
Update: Here is a quote from another article about his speech.
http://cosmiclog.msnbc.msn.com/_news/2011/10/19/8402070-will-china-take-over-the-moon
Bigelow characterized China as "the new gunslinger in Dodge" when it came to space exploration.
The way he sees it, China is progressing along a slow, steady path toward space proficiency. The steps in that path include follow-ups to the Shenzhou 8 spacewalk mission in 2008, the unmanned Chang'e lunar missions and last month's Tiangong 1 space lab launch. In the coming years, China will have plenty of cash for great leaps forward in space, while the United States will be hamstrung by higher debt and tighter budgets.
"Americans are still basking in the lunar glory from 40 years ago," [Robert] Bigelow said. "But we don’t own one square foot of the damn place. NASA is a shadow of the space agency it once was in the 1960s and 1970s."
In contrast, he argued, China has the motivation and ability to win the next space race and claim ownership of much of the moon. Bigelow argued that international law would allow a nation to make such a claim, especially if it were able to enforce it through continuous human lunar presence.
Owning the moon would be a windfall both financially and for international prestige, he said. Not only does it offer a jumping off point for further exploration of the solar system, but it also contains vast stores of valuable resources such as water and helium-3, a possible fuel for nuclear fusion.
Moreover, the symbolic and global psychological impact would be huge, Bigelow said. "I think nothing else China could possibly do in the next 15 years would cause as great a benefit for China."
In addition to China's growing technological prowess, the country has the cash, the lack of debt and the national will to become the owner of the moon, Bigelow argued. He predicted China could claim ownership of vast swaths of lunar territory by 2022 to 2026.
Update: Here is a quote from another article about his speech.
http://cosmiclog.msnbc.msn.com/_news/2011/10/19/8402070-will-china-take-over-the-moon
Bigelow characterized China as "the new gunslinger in Dodge" when it came to space exploration.
The way he sees it, China is progressing along a slow, steady path toward space proficiency. The steps in that path include follow-ups to the Shenzhou 8 spacewalk mission in 2008, the unmanned Chang'e lunar missions and last month's Tiangong 1 space lab launch. In the coming years, China will have plenty of cash for great leaps forward in space, while the United States will be hamstrung by higher debt and tighter budgets.
Thursday, October 20, 2011
Budget blowout
So the CBO projects that the deficit in FY2012 will be 973 billion, dropping to 510 billion in FY2013, and 265 billion in FY2014. We are not off to a promising start so far.
The national debt on 9/30 was 14.790 trillion and has increased to 14.942 trillion by 10/18. So it has increased by 152 billion in only 18 days. This means the deficit for the rest of the fiscal year will be only 821 billion. Unless the CBO has vastly miscalculated.
The national debt on 9/30 was 14.790 trillion and has increased to 14.942 trillion by 10/18. So it has increased by 152 billion in only 18 days. This means the deficit for the rest of the fiscal year will be only 821 billion. Unless the CBO has vastly miscalculated.
Wednesday, October 19, 2011
The threat to global stability still has not been averted
From: http://www.telegraph.co.uk/finance/financialcrisis/8835221/Mervyn-King-time-running-out-to-solve-world-economy-crisis.html
"In a sobering assessment of the world economy, Sir Mervyn warned that even if world leaders managed to agree on emergency moves to support the banking system and debt-stricken economies such as Greece, they would still not have averted the threat to global stability.
...
"In a sobering assessment of the world economy, Sir Mervyn warned that even if world leaders managed to agree on emergency moves to support the banking system and debt-stricken economies such as Greece, they would still not have averted the threat to global stability.
...
The root cause of the debt crisis threatening major Western economies was a long period of 'unsustainably high levels of consumption', in which governments, companies and individuals spent more than they earned, the governor said.
That spending was made possible because fast-growing emerging economies such as China spent much less than they earned, then used their surpluses to lend to the West."Sunday, October 16, 2011
Global Debt Clock
See http://www.economist.com/content/global_debt_clock
The global public debt is now at $43.455 trillion.
The biggest debtors in 2011 are:
Japan $10.917 trillion
US $10.459 tr
Germany $2.302 tr
Italy $2.248 tr
France $2.089 tr
UK $1.831 tr
Canada $1.315 tr
Brazil $1.138 tr
China $1.098 tr
The highest per person debt for the years 2010 and 2012 are:
Japan $83,444 / 87,601
Iceland $43,268 / 41,793
Singapore $42,318 / 43,191
Belgium $40,373 / 42,169
Norway $38,942 / 38,054
Italy $38,025 / 38,284
Canada $36,898 / 39,883
Ireland $35,122 / 43,223
Greece $34,103 / 35,874
France $31,822 / 35,648
Austria $29,225 / 32,479
US $29,053 / 37,953
Netherlands $28,417 / 31,237
Germany $28,932 /28,729
UK $26,522 /32,208
The global public debt is now at $43.455 trillion.
The biggest debtors in 2011 are:
Japan $10.917 trillion
US $10.459 tr
Germany $2.302 tr
Italy $2.248 tr
France $2.089 tr
UK $1.831 tr
Canada $1.315 tr
Brazil $1.138 tr
China $1.098 tr
The highest per person debt for the years 2010 and 2012 are:
Japan $83,444 / 87,601
Iceland $43,268 / 41,793
Singapore $42,318 / 43,191
Belgium $40,373 / 42,169
Norway $38,942 / 38,054
Italy $38,025 / 38,284
Canada $36,898 / 39,883
Ireland $35,122 / 43,223
Greece $34,103 / 35,874
France $31,822 / 35,648
Austria $29,225 / 32,479
US $29,053 / 37,953
Netherlands $28,417 / 31,237
Germany $28,932 /28,729
UK $26,522 /32,208
Interest Costs
I don't know where the CBO is getting their numbers for "net interest". I do have a good source for "gross interest", however. Since gross interest seems to be about double the net interest figures however, let me revise my previous calculations.
I would say that we have reached a tipping point if gross interest exceeds 40% of revenue. When will this occur?
First, here is the data on interest from http://www.treasurydirect.gov/govt/reports/ir/ir_expense.htm
Year Interest
2006 406
2007 430
2008 451
2009 383
2010 414
2011 454
For a projection, I use the CBO's numbers for net interest and double them:
2012 476
2013 526
2014 582
2015 672
2016 814
2017 968
2018 1090
2019 1182
2020 1264
2021 1326
If revenues increase by 5% thereafter, and interest increases 8%, then the 40% tipping point would be in 2036, when revenue is 10330 and interest is 4206.
I am obviously all over the board here in my numbers, but that doesn't change the fact that we do have a problem which won't occur right away.
=================================
Update: The OMB's projections for net interest are much higher. If I use the same formula of doubling net interest to get gross interest, then the projections would be:
2012 480
2013 644
2014 842
2015 1010
2016 1168
2017 1322
2018 1460
2019 1596
2020 1726
2021 1856
The gross interest in 2021 of $1856 billion is 37.7% of the revenues in that year.
=====================
Update 6/19/2012: This is model G-1. Model G is the theory that interest in excess of 40% of revenue is a tipping point.
I would say that we have reached a tipping point if gross interest exceeds 40% of revenue. When will this occur?
First, here is the data on interest from http://www.treasurydirect.gov/govt/reports/ir/ir_expense.htm
Year Interest
2006 406
2007 430
2008 451
2009 383
2010 414
2011 454
For a projection, I use the CBO's numbers for net interest and double them:
2012 476
2013 526
2014 582
2015 672
2016 814
2017 968
2018 1090
2019 1182
2020 1264
2021 1326
If revenues increase by 5% thereafter, and interest increases 8%, then the 40% tipping point would be in 2036, when revenue is 10330 and interest is 4206.
I am obviously all over the board here in my numbers, but that doesn't change the fact that we do have a problem which won't occur right away.
=================================
Update: The OMB's projections for net interest are much higher. If I use the same formula of doubling net interest to get gross interest, then the projections would be:
2012 480
2013 644
2014 842
2015 1010
2016 1168
2017 1322
2018 1460
2019 1596
2020 1726
2021 1856
The gross interest in 2021 of $1856 billion is 37.7% of the revenues in that year.
=====================
Update 6/19/2012: This is model G-1. Model G is the theory that interest in excess of 40% of revenue is a tipping point.
Total Liabilities
From: http://www.federalreserve.gov/apps/fof/DisplayTable.aspx?t=l.5
Series: FL894190005.Q
All sectors; total liabilities
2007 111036.0
2008 111963.7
2009 114109.6
2010 117257.6
This is in billions, so the total increased by 3 trillion in 2010.
Series: FL894190005.Q
All sectors; total liabilities
2007 111036.0
2008 111963.7
2009 114109.6
2010 117257.6
This is in billions, so the total increased by 3 trillion in 2010.
Total Credit Market Debt Owed
From: http://research.stlouisfed.org/fred2/data/TCMDO.txt
1990-01-01 13072.99
1991-01-01 13870.09
1992-01-01 14582.84
1993-01-01 15339.23
1994-01-01 16408.47
1995-01-01 17457.65
1996-01-01 18766.65
1997-01-01 20061.77
1998-01-01 21700.37
1999-01-01 23902.36
2000-01-01 25787.08
2001-01-01 27764.09
2002-01-01 29816.25
2003-01-01 32437.46
2004-01-01 35312.11
2005-01-01 38620.03
2006-01-01 42361.04
2007-01-01 46527.55
2008-01-01 50804.68
2009-01-01 52732.77
2009-04-01 52502.17
2009-07-01 52328.59
2009-10-01 52346.84
2010-01-01 51880.22
2010-04-01 51856.37
2010-07-01 52131.27
2010-10-01 52494.41
2011-01-01 52644.68
2011-04-01 52554.37
This has always gone up until 2009.
1990-01-01 13072.99
1991-01-01 13870.09
1992-01-01 14582.84
1993-01-01 15339.23
1994-01-01 16408.47
1995-01-01 17457.65
1996-01-01 18766.65
1997-01-01 20061.77
1998-01-01 21700.37
1999-01-01 23902.36
2000-01-01 25787.08
2001-01-01 27764.09
2002-01-01 29816.25
2003-01-01 32437.46
2004-01-01 35312.11
2005-01-01 38620.03
2006-01-01 42361.04
2007-01-01 46527.55
2008-01-01 50804.68
2009-01-01 52732.77
2009-04-01 52502.17
2009-07-01 52328.59
2009-10-01 52346.84
2010-01-01 51880.22
2010-04-01 51856.37
2010-07-01 52131.27
2010-10-01 52494.41
2011-01-01 52644.68
2011-04-01 52554.37
This has always gone up until 2009.
Saturday, October 15, 2011
Is interest at 20% of revenues a limit?
Most economists measure debt as a percent of GDP. However, this is really irrelevant, since what matters is a countries ability to pay back the debt, which is dependent on tax revenues. But maybe the level of debt itself is irrelevant and the only thing that matters is the interest cost. At low levels of interest, a country (Japan) could easily carry an enormous level of debt.
However, once interest exceeds a certain percent of revenue, I think the system could reach a tipping point. Maybe taxes could be increased dramatically, but I think a populace would rebel at higher taxes just to pay interest. And maybe other expenses could be cut, but politicians love to spend and entitlement cuts to pay interest also wouldn't be too popular. And maybe more QE could be done, but this risks inflation getting out of control.
I think having net interest costs above 20% of revenues is a tipping point. Maybe the level is slightly higher or lower, but this guess is as good as any. Once interest exceeds this amount, then obviously more debt is being incurred to pay it, the rate demanded would increase and the interest keeps increasing and soon will skyrocket out of control. And either default or hyperinflation would be inevitable.
So, when will the US reach this point? I will use the very conservate CBO numbers that assume that the deficit will be reduced to only 205 billion in 2015. And I will also use the net interest numbers. Using a 5% annual increase in revenue, and a 10% average increase in interest costs after 2021, the 20% level would be reached in 2030, when revenue would be 7709 and interest 1563.
Maybe I am using numbers that are too pessimistic, but isn't it true that at some point interest will be a problem when deficits always increase? So this number is as good as any. And I don't think the numbers are too pessimistic. Taking a more cynical viewpoint (see the prior post), the 20% limit could be reached as early as 2019.
Update 6/19/2012: I am going to call this model F-1. Interesting theory.
However, once interest exceeds a certain percent of revenue, I think the system could reach a tipping point. Maybe taxes could be increased dramatically, but I think a populace would rebel at higher taxes just to pay interest. And maybe other expenses could be cut, but politicians love to spend and entitlement cuts to pay interest also wouldn't be too popular. And maybe more QE could be done, but this risks inflation getting out of control.
I think having net interest costs above 20% of revenues is a tipping point. Maybe the level is slightly higher or lower, but this guess is as good as any. Once interest exceeds this amount, then obviously more debt is being incurred to pay it, the rate demanded would increase and the interest keeps increasing and soon will skyrocket out of control. And either default or hyperinflation would be inevitable.
So, when will the US reach this point? I will use the very conservate CBO numbers that assume that the deficit will be reduced to only 205 billion in 2015. And I will also use the net interest numbers. Using a 5% annual increase in revenue, and a 10% average increase in interest costs after 2021, the 20% level would be reached in 2030, when revenue would be 7709 and interest 1563.
Maybe I am using numbers that are too pessimistic, but isn't it true that at some point interest will be a problem when deficits always increase? So this number is as good as any. And I don't think the numbers are too pessimistic. Taking a more cynical viewpoint (see the prior post), the 20% limit could be reached as early as 2019.
Update 6/19/2012: I am going to call this model F-1. Interesting theory.
Yet another projection
I started this blog to express my concerns about the rising national debt. I concluded a few months ago that it could be continued indefinitely. Obviously there are all sort of assumptions one could make, but one important item to take into account is interest costs. So here is another projection, based on the following assumptions:
1. Start with the budget projections at: http://www.cbo.gov/ftpdocs/123xx/doc12316/BudgetTables.pdf
2. For revenue, I start with the 2011 number of 2314, and then assume a 7% growth through 2021 and a 5% increase thereafter. The 2012 amount is 2476, 2021 is 4549, 2022 is 4776 and so on.
3. For outlays, for discretionary spending, I start with the 2011 of 1353, and then assume a 3% increase through 2021. Total outlays, excluding interest, are 5100 in 2021, and then increase by 5% thereafter. The 2022 outlays are 5355.
4. I think the interest amount is extremely low and this won't continue. Right now the interest payments are only 1.5% of the national debt. So I start with the 2012 projection of 238, and then assume a 20% annual increase through 2019, to get interest of 854. Then I assume that interest will gradually increase from 3.5% of the national debt to 5% of the debt. So the 2020 amount is 3.6% (totalling 892), and the 2034 amount is 5.0% (totalling 2879). This is a little complicated, but the key thing is that long-term interest is assumed to be 5%.
5. There is also some minor effect from the expected savings from the Committe on Debt Reduction. In general I assume that these savings will be only half of what the CBO projects and that they will be phased out by 2024.
I don't know if someone could follow this, but here are a few line items:
2021: revenue 4549, outlays 5100, interest 969, committee savings 70, annual deficit 1451, total national debt 27653
2022: revenue 4776, outlays 5355, interest 1051, committee savings 50, annual deficit 1580, total national debt 29233
2032: revenue 7780, outlays 8723, interest 2428, annual deficit 3371, total national debt 53948
2042: revenue 12673, outlays 14209, interest 4839, annual deficit 6375, total national debt 103151
2058: revenue 27664, outlays 31017, interest 13117, annual deficit 16470, total national debt 278810
I previously speculated that 10 times revenue might be some sort of limit, so this indicates that the system is no longer sustainable after 2058. This is nothing to be panicky about, and is better than some of my previous postings, but that is my current doomsday date and I am sticking to it, for now.
The national debt will exceed $1 quadrillion dollars in 2080.
Is this sustainable? Interest will exceed 10% of revenue by 2013, 20% of revenue by 2019, 30% of revenue by 2031, 40% of revenue by 2046, and 50% of revenue by 2063. This is assuming a constant interest rate of 5%.
I previously speculated that Federal Reserve assets could be used to offset the national debt. Maybe this is so, but even so once interest costs keep rising as a percent of revenue, then I think the trend is irreversible.
Using the CBO numbers, they show interest as 9.6% of revenue in 2011, rising to 13.3% in 2021.
Update 6/19/2012: This is model C-3.
1. Start with the budget projections at: http://www.cbo.gov/ftpdocs/123xx/doc12316/BudgetTables.pdf
2. For revenue, I start with the 2011 number of 2314, and then assume a 7% growth through 2021 and a 5% increase thereafter. The 2012 amount is 2476, 2021 is 4549, 2022 is 4776 and so on.
3. For outlays, for discretionary spending, I start with the 2011 of 1353, and then assume a 3% increase through 2021. Total outlays, excluding interest, are 5100 in 2021, and then increase by 5% thereafter. The 2022 outlays are 5355.
4. I think the interest amount is extremely low and this won't continue. Right now the interest payments are only 1.5% of the national debt. So I start with the 2012 projection of 238, and then assume a 20% annual increase through 2019, to get interest of 854. Then I assume that interest will gradually increase from 3.5% of the national debt to 5% of the debt. So the 2020 amount is 3.6% (totalling 892), and the 2034 amount is 5.0% (totalling 2879). This is a little complicated, but the key thing is that long-term interest is assumed to be 5%.
5. There is also some minor effect from the expected savings from the Committe on Debt Reduction. In general I assume that these savings will be only half of what the CBO projects and that they will be phased out by 2024.
I don't know if someone could follow this, but here are a few line items:
2021: revenue 4549, outlays 5100, interest 969, committee savings 70, annual deficit 1451, total national debt 27653
2022: revenue 4776, outlays 5355, interest 1051, committee savings 50, annual deficit 1580, total national debt 29233
2032: revenue 7780, outlays 8723, interest 2428, annual deficit 3371, total national debt 53948
2042: revenue 12673, outlays 14209, interest 4839, annual deficit 6375, total national debt 103151
2058: revenue 27664, outlays 31017, interest 13117, annual deficit 16470, total national debt 278810
I previously speculated that 10 times revenue might be some sort of limit, so this indicates that the system is no longer sustainable after 2058. This is nothing to be panicky about, and is better than some of my previous postings, but that is my current doomsday date and I am sticking to it, for now.
The national debt will exceed $1 quadrillion dollars in 2080.
Is this sustainable? Interest will exceed 10% of revenue by 2013, 20% of revenue by 2019, 30% of revenue by 2031, 40% of revenue by 2046, and 50% of revenue by 2063. This is assuming a constant interest rate of 5%.
I previously speculated that Federal Reserve assets could be used to offset the national debt. Maybe this is so, but even so once interest costs keep rising as a percent of revenue, then I think the trend is irreversible.
Using the CBO numbers, they show interest as 9.6% of revenue in 2011, rising to 13.3% in 2021.
Update 6/19/2012: This is model C-3.
SS to turn negative in 2015
From http://www.zerohedge.com/contributed/social-security-bernanke-%E2%80%93-%E2%80%9Cyou%E2%80%99re-killing-us%E2%80%9D
"One very possible outcome is that 2013 and 2014 will bring (more or less) what we have in 2011/12. AKA Stagflation. Ladies and Gentleman that would be an unmitigated disaster. Should we have more years of stagflation, the net surpluses (includes % income) at SS would fall to zero in 2014 and be negative in 2015. Once that line is crossed, it rapidly collapses. It's nearly impossible to reverse."
"One very possible outcome is that 2013 and 2014 will bring (more or less) what we have in 2011/12. AKA Stagflation. Ladies and Gentleman that would be an unmitigated disaster. Should we have more years of stagflation, the net surpluses (includes % income) at SS would fall to zero in 2014 and be negative in 2015. Once that line is crossed, it rapidly collapses. It's nearly impossible to reverse."
Saturday, October 8, 2011
Total Debt
Here is an interesting chart of U.S. total debt, including household, corporate, and local governments, in billions.
From: http://www.federalreserve.gov/releases/z1/Current/z1r-2.pdf
1977 2826.6
1978 3211.2
1979 3603.0
1980 3953.5
1981 4361.7
1982 4783.4
1983 5359.2
1984 6146.2
1985 7123.1
1986 7966.3
1987 8670.1
1988 9450.7
1989 10152.1
1990 10834.9
1991 11301.4
1992 11816.5
1993 12391.4
1994 12973.6
1995 13667.5
1996 14399.8
1997 15210.8
1998 16216.4
1999 17291.3
2000 18165.4
2001 19297.5
2002 20716.1
2003 22443.8
2004 24445.0
2005 26770.8
2006 29181.1
2007 31700.8
2008 33605.9
2009 34641.0
2010 36068.2
2011-Q2 36516.8
My thoughts:
The total debt has never gone down. It does within a sector, such as household debt, but the total always increases. Our financial system seems to depend on ever greater amounts of debt to infinity.
Right now, the household sector is delevering. The total household debt as of 11Q2 is 13298. The last time it was lower than this was in 7Q1 when the total was 13179.
In order to keep the total expanding while a major portion of it is declining requires that the federal government step in to prop up the total. It seems that the government is the guarantor, not of all the debt, but of any decreases in other sectors. The trend is that the debt moves off private balance sheets to the public balance sheet.
The question remains, how long until the U.S. public balance sheet is so bloated that it pops? Can this continue indefinitely?
From: http://www.federalreserve.gov/releases/z1/Current/z1r-2.pdf
1977 2826.6
1978 3211.2
1979 3603.0
1980 3953.5
1981 4361.7
1982 4783.4
1983 5359.2
1984 6146.2
1985 7123.1
1986 7966.3
1987 8670.1
1988 9450.7
1989 10152.1
1990 10834.9
1991 11301.4
1992 11816.5
1993 12391.4
1994 12973.6
1995 13667.5
1996 14399.8
1997 15210.8
1998 16216.4
1999 17291.3
2000 18165.4
2001 19297.5
2002 20716.1
2003 22443.8
2004 24445.0
2005 26770.8
2006 29181.1
2007 31700.8
2008 33605.9
2009 34641.0
2010 36068.2
2011-Q2 36516.8
My thoughts:
The total debt has never gone down. It does within a sector, such as household debt, but the total always increases. Our financial system seems to depend on ever greater amounts of debt to infinity.
Right now, the household sector is delevering. The total household debt as of 11Q2 is 13298. The last time it was lower than this was in 7Q1 when the total was 13179.
In order to keep the total expanding while a major portion of it is declining requires that the federal government step in to prop up the total. It seems that the government is the guarantor, not of all the debt, but of any decreases in other sectors. The trend is that the debt moves off private balance sheets to the public balance sheet.
The question remains, how long until the U.S. public balance sheet is so bloated that it pops? Can this continue indefinitely?
Wednesday, October 5, 2011
Good News
The average increase in the debt is now 2.48%/quarter or 10.29%/year. This is slightly better than the previous average increase. If these trends continue, the future total national debt will be as follows:
9/30/2011 14790
9/30/2012 16312
9/30/2013 17990
9/30/2014 19842
9/30/2015 21883
9/30/2016 24135
9/30/2017 26619
9/30/2018 29358
9/30/2019 32379
9/30/2020 35710
9/30/2021 39385
I would like to see this drop to 1.75% per quarter, or 7% per year.
9/30/2011 14790
9/30/2012 16312
9/30/2013 17990
9/30/2014 19842
9/30/2015 21883
9/30/2016 24135
9/30/2017 26619
9/30/2018 29358
9/30/2019 32379
9/30/2020 35710
9/30/2021 39385
I would like to see this drop to 1.75% per quarter, or 7% per year.
Monday, October 3, 2011
Crisis in 2013?
Dalio believes that some heavily indebted countries, including the United States, will eventually opt for printing money as a way to deal with their debts, which will lead to a collapse in their currency and in their bond markets. “There hasn’t been a case in history where they haven’t eventually printed money and devalued their currency,” he said. Other developed countries, particularly those tied to the euro and thus to the European Central Bank, don’t have the option of printing money and are destined to undergo “classic depressions,” Dalio said. The recent deal to avoid an immediate debt default by Greece didn’t alter his pessimistic view. “People concentrate on the particular thing of the moment, and they forget the larger underlying forces,” he said. “That’s what got us into the debt crisis. It’s just today, today.”
Dalio’s assessment sounded alarmingly plausible. But when one plays the global financial markets a thorough economic analysis is only the first stage of the game. At least as important is getting the timing right. I asked Dalio when all this would start to come together. “I think late 2012 or early 2013 is going to be another very difficult period,” he said.
Read more http://www.newyorker.com/reporting/2011/07/25/110725fa_fact_cassidy?printable=true¤tPage=all
Dalio’s assessment sounded alarmingly plausible. But when one plays the global financial markets a thorough economic analysis is only the first stage of the game. At least as important is getting the timing right. I asked Dalio when all this would start to come together. “I think late 2012 or early 2013 is going to be another very difficult period,” he said.
Read more http://www.newyorker.com/reporting/2011/07/25/110725fa_fact_cassidy?printable=true¤tPage=all
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