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.
...

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."

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

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.

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.

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.

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.

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.

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."

A year from today, we will be in a recession

Kyle Bass

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?

Crisis by end of October

"... within 2 to 3 weeks we will have a meltdown in sovereign debt ..."

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.

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&currentPage=all

Spaceport America is almost ready to open

Phase one of the world's first commercial spaceport, which will be the hub for Virgin's consumer spaceflights, is now 90 per cent complete.
The 1,800-acre Spaceport America site, in Las Cruces, New Mexico, is the home base for Virgin Galactic, Richard Branson's most ambitious business venture yet.
It already boasts a runway stretching to nearly two miles long, a futuristic styled terminal hanger, and a dome-shaped Space Operations Centre.

Read more: http://www.dailymail.co.uk/sciencetech/article-2034239/Phase-worlds-commercial-spaceport-90-cent-completed--time-flights-2013.html#ixzz1XFJ163Gh

The Norwegian Krone is the new Swiss Franc

"Norway’s krone rose against all its 16 most-traded counterparts as investors sought an alternative European currency to the euro and franc. ... The krone rose 1.3 percent to 5.3713 per dollar and advanced 1.9 percent to 7.5260 versus the euro. The currency surged 9.5 percent to 6.2634 against the franc."

--http://www.bloomberg.com/news/2011-09-06/franc-slides-against-dollar-euro-as-snb-vows-to-stand-by-currency-target.html

A simple solution to the debt crisis

Greece to default this week

The expectation is that a Greek default is imminent. Last week, the yield on Greek 1 year bonds was a mind-blowing 61%. On Friday, it jumped to 72%. Now it is at 83% and climbing rapidly. The 2 year yield is now over 50%.

This could be a question on a finance exam. Assuming an investor would want 2% return on a no-risk investment, and Greece is certain to default but not immediately, what would be the expected date of a Greek default? Assume interest is accrued monthly.

For the 2 year bonds, this is 18 months, because at that point the interest earned would fully repay the initial investment.
For the 1 year bonds, this is 11 months.

What if the bonds will be worth 50% of face value after a default, what then?
For 2 year bonds, 11 months.
For 1 year bonds, 7 months.

What about a higher value, say 70%?
For 2 year bonds, 7 months.
For 1 year bonds, 5 months.

What about 10 year bonds, now priced at 19.4%?
If they will be worth 50% after default, then a default is expected in 26 months.
If they will be worth 70% after default, then 17 months.
If no remaining value, then 44 months.

If it is true that a default is imminent, then even 83% interest isn't high enough. Assuming 70% residual value and default would occur in 1 month, then what interest rate is appropriate? Answer: 360% interest. This would provide $30 of interest to make up for the 30% haircut.

Assume that the 1 year bond pays no interest, and will pay $100 on maturity. How much would you pay for it to get an effective interest rate of 83% (with interest accrued monthly)? Answer: $47.

What about a 2 year bond, with an interest rate of 50%, accrued monthly, that pays no interest? $38.

1.75% per quarter means doubling in 10 years

If a number grows by 1.75% per quarter, then it will double in 10 years. When we are talking about the national debt, then we want it to grow by less than this amount. The national debt is projected to increase "only" $973 billion next year, which would be less than this amount, since the debt is now at about $14.7 trillion. Somehow I have my doubts that this will happen.

Debt held by the public reaches 10 trillion

08/31/2011 10,024,253,354,407.07

It first reached 9 trillion on 9/30/2010.

Eurozone to split in two

According to German historian Hans-Joachim Voth, the Eurozone will split within 5 years. Germany will leave along with Austria, Finland, the Netherlands and Denmark and reintroduce the Deutschmark. The leftovers will keep the Euro - France, Italy, Spain, Belgium, Portugal, Ireland, and Cyprus. The leftover Euro can then be devalued to assist these struggling countries.