The Re-Leveraging Hypothesis

I started this blog to try to understand what is wrong with our system and how much longer it is sustainable.  Here is another thought.

I am going to use 9/30/2001 as a starting date, right after the 9/11 attacks, when the U.S. is coming out of a mild recession.  TCMDO is 28743, and GDP is 10305. Federal debt held by the public (FDHBTP) is 3339. The ratio of TCMDO to GDP is 280%. TCMDO less FDHBTP is 25404, which is 246% of GDP. Presumably this is sustainable because this is the start of a growth cycle.

Now jump forward to 9/30/2008, right after the Lehman Brothers collapse. TCMDO is 52985, GDP is 14395, and FDHBTP is 5814. The ratio of TCMDO to GDP is 368%. TCMDO less FDHBTP is 47171, which is 328% of GDP. This is because of the huge real estate bubble.

If the government and the Fed had not intervened, presumably the TCMDO less FDHBTP would have collapsed and delevered back to about 36000, the sustainable level. This would have been incredibly painful, but would have happened over a couple of years until it dropped to a sustainable level. Instead, the government intervened, and it will take longer.

What is happening is that federal debt is refilling the collapsing bubble. The stimulus provided by the huge deficits is being used to repay the excess debt. As of 9/30/2012, TCMDO is 55668, GDP is 15811, and FDHBTP is 11274. TCMDO less FDHBTP is 44394, which is 280% of GDP. So there is another 30% GDP (4700) worth of debt that the system is trying to delever out of.

What percent of the federal debt is being used to pay back the private debt? Compare the numbers from 9/30/2011, when TCMDO was 54212, GDP was 15163, and FDHBTP was 10132. TCMDO less FDHBTP was 44080, which was 290% of GDP. So at the time, there was about 6000 of excess debt. So it delevered 1300, when the public debt increased by 1142. So it is safe to assume that all the federal debt was in effect used to pay back private debt.

With the deficits running about 1200 per year, we can see that it will take about 4 more years for the level of private debt to get back to where it is a "normal" 250% of GDP. So we are looking at 9/30/2016, for a return to "normalcy". At this point TCMDO will be about 60000, the public debt will be about 16000, and GDP will be about 17500.

So based on this, I think trillion dollar deficits are sustainable for about 4 more years, after which they need to drop to zero. This will be when the public debt is about 16000 (that is $16 trillion).

Continuing these huge deficits after that point will be hyperinflationary. So this solves for me the question of how is this possibly sustainable.

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Note: I just said in an earlier post that TCMDO would be 61000 by 2014. So obviously I don't have a good handle on it. Anyways, something to keep an eye on.