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%
Tuesday, November 15, 2011
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.
Subscribe to:
Posts (Atom)