New Projection: 2038

Here is my latest revised projection of deficits. I don't show it here, but it crosses the 150% of GDP line in 2038.  The main change is that revenue is reduced.  The revenue numbers come from the CBO, and the adjustment comes from the CRFB, consisting of tax cut extensions and continued AMT patches.  I wish that revenue would be as high as the CBO projects, but I just don't see it.

Medicare and Medicaid spending seem to have slowed recently, so the projections seen here may be too high.  For instance Medicare, FYTD is only $176 billion, making an annualized amount  $422 billion, much lower than the $560 billion projected here.  I think my numbers came from the Medicare projections.  Anyways this is good news but I would like to see if the trend continues before adjusting my projected spending.

So maybe my projections are a little too bleak.  Still, I want to see "facts on the ground" before producing my positive projections, and with February's deficit at an all time high, I am not seeing them, except for slightly reduced Medicare and Medicaid spending.

Update: I am looking at the official budget for defense spending and it shows defense spending of $688 billion in 2012 and $673 billion in 2013.  So these numbers need to be adjusted.

Update April 6:  I did a revised projection based on lower Medicare and Medicaid numbers and the situation looks a little better - deficit of only 1321 in 2012 instead of 1473 - but still I don't see the deficit ever dropping below 1 trillion/year.  And the endpoint is still in 2038. 

What if interest rates remain low?

It may be theoretically possible for the Fed to manipulate interest rates so they remain low forever. So I ran another scenario with interest rates never rising above 3%.  Everything else from the prior projection remains the same.  This extends the tipping point until 2040.

I don't show all the detail here, but the deficit still never drops below $1 trillion per year.  And the deficit first tops $2 trillion in 2028, after which things rapidly deteriorate.  So interest paid is not the cause of the crisis.  The crisis, to reiterate, is out-of-control Social Security, Medicare, and Medicaid costs.

New Projection: 2036

I couldn't help myself and ran a new projection.  First, start with the most recent CBO baseline, just released. The CBO projects deficits as low as 196 billion in 2018.  I think the CBO is smoking crack, and I don't see the deficit ever dipping below $1 trillion/year.

I take the revenues as given, but  adjust them for tax cuts extensions and AMT patch, as stated by the CRFB.  I accept the projections for Social Security, Medicare and Medicaid through 2022, except for 2012 when the CBO projects a decrease in Medicaid spending.  After 2022, I project Social Security and Medicare increasing by 7% per year, and Medicaid increasing by 8.3%.  For other spending I project it increasing by 1% per year through 2022, and then 4.4% thereafter.  Sorry, I just don't see spending actually decreasing.

I project nominal GDP as increasing by 4.4%/year after 2022, and revenue as maxing out at 20% of GDP and also increasing by 4.4%/year after 2022.  There are some other assumptions I made which are not mentioned.

I assume that the dollar is stronger than previously assumed and will be stable until the net debt hits 150% of GDP.  The tipping point is reached in 2036.  The problem is that Social spending will continue to increase faster than revenue, and interest rates will skyrocket from 1.7% of GDP in 2012 to 8.4% of GDP in 2036.

I have previously opined that the dollar could survive as long as there was no alternative.  Well, I think an alternative will emerge out of necessity.

Is there any way of forestalling this?  Yes, a combination of higher revenue, caps on social spending, and continued low interest rates.

Update 6/19/12: Model K-1

Reserve Currency Theory

Reserve Currency Theory is a new term I just invented to describe why the US can issue so much debt. It is simply because the US Dollar is the world's reserve currency. So long as the dollar continues in this role, then the US can issue an almost infinite amount of debt.

MMT (Modern Monetary Theory) is the latest preferred term for theory that was previously called Keynesianism.  Keynesianism, if I understand it correctly, states that the government should run a surplus when times are good and a deficit when times are bad to counterbalance the economy.  MMT, if I understand it correctly, states that government debt is necessary for private savings, and to increase the money supply, and so government deficits are not bad per se.  However, even so, under MMT, there is a limit to how much debt a country can incur before it reaches the Keynesian endpoint.

Another version of it is called Monetary Sovereignty, and advocate it as the cure for whatever economic ails a country has.  So Monetary Sovereignty adherents would tell Greece to regain its monetary sovereignty and inflate away its debts.  However the truth is that nobody would want to use the Greek drachma unless they were forced to.

So under my theory, world currencies are split into 4 categories.  First, the dollar (which I will come back to).  Second, the currencies which are linked to the dollar and for all practical purposes are also dollars, just under a different name.  Third, the "normal" currencies, such as the Euro, Canadian dollar, etc. which are commonly traded on the Forex markets and to which MMT may have some relevance.  Fourth, the "local" currencies, such as the Botswana pula, or the proposed Greek drachma, which are used only as a local currency.  No foreigner would buy debt denominated in the local currency.

The dollar is exempt from the "laws of gravity".  The US can issue an almost infinite amount of dollars.  When the US issues enough dollars to deflate their value, then the other countries issue more of their currencies in turn in a process called competitive devaluation.

But what about a gold-backed currency?  Maybe it would make sense for some country to issue a gold-backed currency, like the gold dinar,  meant to be an alternative to the dollar.  But people wouldn't use it as a currency for most transactions simply because of Gresham's law ("bad money chases out good").  It would be used as a store of value, however.

What about the euro or yuan?  At the moment it appears that neither of these will replace the dollar.  For a currency to do so, it would have to have a Lender of Last Resort, and a well-developed centralized market for debt. 

So, assuming my theory is true, what should the US do?  It should use the power it has been given, issue more debt, and buy up debt of European countries (earning the interest that they pay), and invest in big infrastructure projects, like a tunnel under the Gibraltor straits.

I will be looking for arguments to further develop or to challenge this theory.

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Update: I am tagging this as a projection that the US economy can survive almost indefinitely or at least until 2099.

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Update 6/19/12.  This isn't a model, its an article on the almighty US dollar.  If the US runs into severe problems, there will be alternatives, even if we can't see what they would be right now.

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.

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).

Update 6/19/2012: This is model J-5.

Doomsday in 2027

Update 6/19/2012: This is model J-4.

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.

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.

New projection - slightly better

I did a previous projection showing that the National Debt will increase an average of 14.5% per year. My latest calculations shows that the average rate of increase has slowed slightly from 3.44% per quarter to 3.36% per quarter (based on the time frame of 3/31/2009 to 12/31/2010). The annual increase will slow to 14.1%. Under this calculation, we arrived at the following projections:

9/30/2011 15474
9/30/2012 17656
9/30/2013 20146
9/30/2014 22986
9/30/2015 26227
9/30/2016 29925
9/30/2017 34145
9/30/2018 38959
9/30/2019 44452
9/30/2020 50720

If the government's projections about revenues are correct, and if my theory about 10 times revenue being the breaking point is correct, then the system should be able to stumble along until 2020, when revenues are projected at 4710 with debt at 50720. This is 3 years later than my previous scenario.

Update 6/19/2012:  This is model D-2 and it is also too pessimistic.

New Prediction: we have until 2028

The good news is that I think we have a few more years before the financial collapse I see occurring. My new year is 2028, and my figures are as follows:

Year Debt GDP %
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2009 11,910 14,273 83
2010 13,410 14,563 92
2011 14,866 14,927 100
2012 16,109 15,300 105
2013 17,330 15,683 111
2014 18,780 16,075 117
2015 20,480 16,447 124
2016 22,511 16,889 133
2017 24,806 17,311 143
2018 27,382 17,744 154
2019 30,392 18,187 167
2020 33,823 18,642 181
2021 37,426 19,108 196
2022 41,210 19,586 210
2023 45,182 20,075 225
2024 49,354 20,577 240
2025 53,733 21,092 255
2026 58,332 21,619 270
2027 63,161 22,159 285
2028 68,231 22,713 300

Notes: 1. These numbers are much more optimistic than the previous figures. However, the problem still exists.
2. I'm using dates ending on 9/30 of each year instead of 12/31 as I previously did. It doesn't really make a difference except for the first few years.
3. I'm assuming GDP growth of 2.5%/year, whereas previously I was using 2%.
4. For revenue, I am using the CBO number of 2460 for 2011, assuming 10% growth in 2012-2013, and 5% growth thereafter.
5. For expenses, I am using the CBO numbers through 2020, but adding a 3% cumulative "fudge factor" starting in 2011. I assume that spending will be 3% higher than they project. After 2020, I assume that spending will increase 5%/year.
6. In none of these years does the annual deficit exceed revenue. If this were ever to occur, I think this would be a warning sign of an imminent collapse.

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Update 6/19/2012:

I am labeling this model A-2.  The debt projection seems spot on, but the GDP numbers are too low. I think this model has ongoing validity.