Bank Of International Settlements Sees US Debt/GDP At Over 400% By 2040

Tyler Durden's picture

It's one thing to hear fringe bloggers raving breathlessly against the collision course that the US economy is on. It is something else to see the Bank of International Settlements call for the baseline projection for US debt/GDP to hit over 400% by 2040. And this excludes the bankrupt GSEs, bankrupt Social Security, and the soon to be bankrupt Medicare. In a must read report, the BIS (of the central bankers' central bank) provides the much needed segue to the work of Reinhart and Rogoff, and in not so many words confirms that the entire developed world is now bankrupt on a discounted basis. With Debt/GDP ratios for virtually everyone expected to jump to over 400% in the bank's baseline scenario, it is no surprise why the Dow may well hit 1 quadrillion on nothing but Weimar and Zimbabwean ponzification, before it crashes instantaneously to zero. We exaggerate about the quadrillion, we do not exaggerate about the sovereign default. The current and previous administrations have doomed this country, just as all other administrations of the developed world have done the same, in order to bail out the banking system, in the greatest fatally flawed private-public risk transfer experiment ever attempted. Those who will walk out of it with virtually infinite wealth are about 0.1% of the US population (the same people who tell you now that all is well, and that their bonuses are fully justified). Those who won't, and will end up doing bad things to the aforementioned cohort, is everyone else. And the "everyone else" is getting angrier by the day, as they realize just how massive the wealth transfer scam truly is... if only they could tear themselves away from the iCrap, watching Tiger Woods' nonsensical Nike ads, or glower in schadenfreude as Simon Cowell rips another wanna be singer from head to toe.

Some key snippets from the BIS report:

Should we be concerned about high and sharply rising public debts? Several advanced economies have experienced higher levels of public debt than we see today. In the aftermath of World War II, for example, government debts in excess of 100% of GDP were common. And none of these led to default. In more recent times, Japan has been living with a public debt ratio of over 150% without any adverse effect on its cost. So it is possible that investors will continue to put strong faith in industrial countries’ ability to repay, and that worries about excessive public debts are exaggerated. Indeed, with only a few exceptions, during the crisis, nominal government bond yields have fallen and remained low. So far, at least, investors have continued to view government bonds as relatively safe.

But bond traders are notoriously short-sighted, assuming they can get out before the storm hits: their time horizons are days or weeks, not years or decades. We take a longer and less benign view of current developments, arguing that the aftermath of the financial crisis is poised to bring a simmering fiscal problem in industrial economies to boiling point. In the face of rapidly ageing populations, for many countries the path of pre-crisis future revenues was insufficient to finance promised expenditure.

There is no need to repeat just how horrendous the fiscal deficit picture is. Yet we will:

Overall fiscal balances have been deteriorating sharply – by 20–30 percentage points of GDP in just three years. And, unless action is taken almost immediately, there is little hope that these deficits will decline significantly in 2011. Even more worrying is the fact that most of the projected deficits are structural rather than cyclical in nature. So, in the absence of immediate corrective action, we can expect these deficits to persist even during the cyclical recovery.

Based on a very comprehensive data set, Reinhart and Rogoff (2009a) report that three years after a typical banking crisis the absolute level of public debt is on average about 86% higher than prior to the crisis. In those countries where the crisis was most severe, debt almost trebled. This time around, several countries are beyond this historical average: Ireland with increases in public debt of 98% between 2007 and 2009; and the United Kingdom with projected rises of 111% by 2011. Meanwhile, the United States and Spain – with projected increases of 75% and 78%, respectively, by 2011 – are not far behind.

We doubt that the current crisis will be typical in its impact on deficits and debt. The reason is that, in many countries, employment and growth are unlikely to return to their pre-crisis levels in the foreseeable future.8 As a result, unemployment and other benefits will need to be paid for several years, and high levels of public investment might also have to be maintained

It also bears repeating that recently the Bank of England estimated that the total loss in output as a result of the banking crisis could be large as $200 trillion. That's a lot of money.

Next, the BIS covers a favorite topic of ours, which continues to get virtually no coverage in the mainstream media - the increasingly problematic demographic shift, as all those deferred retirement obligations will finally need to start getting paid out.

More worryingly, the current expansionary fiscal policy has coincided with rising, and largely unfunded, age-related spending (pension and health care costs). Driven by the countries’ demographic profiles, the ratio of old-age population to working-age population is projected to rise sharply. Interestingly, this rise is concentrated in countries such as Japan, Spain, Italy and Greece, which are already laden with relatively high debts (Graph 2, left-hand panel). Added to the effects of population ageing is the problem posed by rising per capita health care costs.

This leads us to the obvious conclusion that any assessment of the government fiscal situation based on a short-term perspective is incomplete and at best misleading. A key question is to what extent such accrued liabilities should be reflected in debt estimates. Concerns about both fiscal sustainability and intergenerational equity demand that the accumulated net discounted value of all future revenues and expenditure commitments scheduled in current laws be added to the current debt stock. Currently, however, there is no unique source providing such estimates. And uncertainty about future policy, demography and productivity growth raises issues about how this information should be presented and used (see eg Auerbach (2008) for a discussion).

That said, existing studies report that the magnitude of the long-term fiscal imbalance – the present value of unfunded liabilities arising from ageing – is very large. Hauner et al (2007) estimate the change in the primary balance required to equate the net present discounted value of all future revenues and non-interest expenditures to the debt levels prevailing at the end of 2005 for seven major industrial countries (Canada, France, Germany, Italy, Japan, the United Kingdom and the United States). The authors report that in order for these countries to pay off all their financial liabilities, they would require an average improvement in their budget balance excluding interest payments of 4.5% of GDP. For the United States and Japan, the estimate is 6.9% and 6.2%, respectively.

The persistent stickiness of low interest rates is another troubling point, and the BIS discusses this as well.

So far, the build-up of public debt in industrial countries has taken place against the backdrop of an exceedingly low interest rate environment. Despite low inflation, the real interest rate (in effective terms) at which governments are able to finance their deficits and roll over outstanding debt obligations has been falling since the late 1990s, reaching almost zero in some countries in the wake of the monetary policy response to the financial crisis (Graph 3, left-hand panel). However, as the graph reveals, the situation is changing quickly even without a change in monetary policy-controlled interest rates. Real borrowing rates rose through 2009, and are poised to continue increasing with the reversal of the current zero interest rate policy. Added to this is the fact that the crisis is likely to reduce the potential output growth rate for some time to come (Cecchetti and Zhu (2009)).

The right-hand panel of Graph 3 is indicative of the severity of the problems that governments face. It plots a measure of the difference between the real interest rate and real growth on the horizontal axis and the ratio of the primary surplus to total debt on the vertical axis. The higher the differential between the real interest rate and potential output growth, the larger the required structural primary surplus as a proportion of the previous-period debt level needed to maintain a stable debt/GDP ratio. Turning to the graph, for debt/GDP to remain stable, a country must be above the 45-degree line on the graph (which appears relatively flat due to the differences in the horizontal and vertical scale). The data show that the current fiscal policy is unsustainable in every country in the graph. Drastic improvements in the structural primary balance will be necessary to prevent debt ratios from exploding in future.

And if the last chart was not enough to stop you dead in your tracks, the next one is the piece de resistance.

Presented without commentary:

Well, one little comment - essentially at this point the entire world is bankrupt. Yet the bankers will keep on trending the market higher and higher on ever declining volumes, to perpetuate the illusion that things are getting better. If that means that GETCO will quote a market of 1,000,000 x 1,000,000,000 for 2 shares of SPY at some point in the future, we would not be surprised. It is merely an artifice for the financial kleptocrats to cash out from as high a point as possible as they try to sucker ever greater numbers of people into the parabolic phase of the ponzi. Yet the numbers don't lie. No matter what Obama does, no matter how he spins the CBO data, or how much healthcare reform is presented as revenue generating, the final outcome is now certain, and it involves the chain bankruptcies of every developed nation. And since the developed world is merely a cheap source of commodities and processed products for the developed world, the BRICs of the world will be next.

Previously, few dared to discuss the ponzi openly. With the BIS now getting into the fray, the issue of sovereign insolvency is now front and center. Of course, few will dare to forecast when the great unravelling will begin. And neither will we, suffice to say that as more and more people read disclosure such as the above, coming from the most legitimate of financial institutions, the more people will awake to the true cataclysm that has now enveloped Western society, which if the Roman empire was any indication, is in last days. Except unlike the Roman case study, the barbarians are not at the gate: they represent 90% of the population of America itself and are already inside the gate. And they are getting angrier with each passing day.

Full must read BIS report link.

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AnonymousMonetarist's picture

Thank God we'll all be billionaires by then!

caconhma's picture

BIS is so wrong. The USA will be there well before 2015 or we might have a name change.

Take care.

Bear's picture

Damn ... I'm still holding my Money Markets waiting for the Great Deflation

arnoldsimage's picture

errrr... the united states will not be around in 30 years. sorry to burst your bubble.

Divided States of America's picture

Yup, Planet Earth may become a wasteland by then

crosey's picture

Arnold, who is your avatar?!

Hephasteus's picture

It'll be a round but it'll be ripped to shreds by a massive quake through the apalachians. Everything from chicago to the gulf will be a wreck.

Mako's picture

It's over.

All you guys are complaining about the amount of debt taken on, well the only way the system survives is if someone takes on more and more at an exponential rate.  There is only one problem after about 60 years exponential growth is a bitch.  

It was a pyramid scheme from the beginning, I don't know why everyone is complaining now. 

BS Inc.'s picture

I complain because I can. Also, one hopes it will help build credibility post-collapse to have been a complainer rather than one of those who just went along with the idea that all was still well.

Hephasteus's picture

It's 2030? Because there's so much hidden crap if it's not at 190% right now I'll eat my hat.

JW n FL's picture


Date Debt Held by the Public Intragovernmental Holdings Total Public Debt Outstanding





12/29/2006 4,901,046,516,367.78 3,779,177,863,718.40                   8,680,224,380,086.18



01/02/2008 5,130,778,241,224.70 4,079,809,202,837.77                   9,210,587,444,062.47




6,320,066,198,644.34 4,307,895,097,286.33                  10,627,961,295,930.67



12/31/2009 7,811,008,785,487.30 4,500,340,892,024.73                  12,311,349,677,512.03



AssFire's picture

Are we supposed to be impressed with the numbers?? I thought postings were to convey some meaning...wait here is a good one for you: 11/27/2006 13,827,635,252,840,3262,937,624,372,947,234,372 JW is a LOSER.

Bear's picture

It's code! Didn't you see "Knowing" ... decode the numbers and you will know when The End will come.

merehuman's picture

i would rather come at the end.

KevinB's picture

And after more than 19 seconds!


Bear's picture


Malaysia - 11 Billion ... We must give Treasuries away as foreign aid


carbonmutant's picture

Sounds like we need a "Bad Nation" that everybody can dump their bad paper on...

hedgeless_horseman's picture

Lichtenstein, or however it is spelled.

Really, at some point isn't Jubilee the only answer?  However, I think it probably comes after the first three events on this list:

  1. Deflation
  2. Inflation
  3. War
  4. Jubilee
  5. Rapture
Miles Kendig's picture

Then drop it like an old Vegas hotel and start over again.

Mad Max's picture

All signs are pointing to the US as being the selected "bad nation."

Crab Cake's picture

I vote Germany.  Wait that's been done twice already.

How about China?

SayTabserb's picture

Excessively alarmist, caused by not reading Prof. Krugman's column this morning and drinking weak coffee. Prof. Special K assures us that government "penny pinching" is the real problem, a failure to take to heart the Keynesian solution to all things cyclical. All we need to do is to reverse the arrow of time to 1945, when the U.S. knew how to take control by becoming the world's factory and shipping goods all over the world to demolished countries. The crazy BIS is assuming this is NOT 1945, and that the U.S. economy is a hollowed-out shell based on borrowing and government bailouts. No wonder they got it so far wrong!

Call_me_Al's picture

Prof. K-man also kinda sidestepped the issue of what it took to take that amount of debt in 1940s. I do not quite understand if he presumes that modern investors would gobble up modern 'non-war' bonds with good enough appetite to buy that much of gov. debt, esp. while they know from the same prof's musings what should happen to the money.

deadparrot's picture

Ummm, yeah! It's easier to sell bonds to people when it is for a noble cause like fighting a just war. If some govt flunky shows up at my door to sell save the boomer bonds, I, like most people will spit in his face. Why do you think the govt is enacting all this legislation to grab offshore assets and stuff 401ks full of treasuries. Politicians may be the world's worst money managers, but they are experts when it comes to human nature.

Wilderman's picture

I love special K's tinkerbell outlook.

We'll just skip from 1930 to 1945, avoiding all the bad stuff in between, and everything will be fine!

Now, everyone clap your hands, and say with me "I believe in fairies, I believe in fairies, I believe in fairies..."

Rogerwilco's picture

How can this report be construed as troubling or negative news? A 400% debt to GDP ratio means the party will continue with bailouts for all. Japan writ large. A big positive for equities and commodities if you ask me (but nobody does).

cossack55's picture

Check graph 4 again.  According to the charts Japan wins with a high score of 600.  You guys really need to spend more time on the sports blogs.


Carl Marks's picture

This so called debt is a good thing because the government can take over the economy under the commerce clause and everything will be fine.

Crummy's picture

Let me do some calculations here.... Let's see, zero divided by zero...

Pure Evil's picture

Only on a calculator, ..., as for the bung holes in D.C., well that's a rhetorical question.

CombustibleAssets's picture

NO, no, no it's not zero. It's negative and negative numbers are now a commodity... like gold.

Everybody is swapping and trading each others debt. It's the new economy. More debt means more money.

RockyRacoon's picture

Hey, not to be an alarmist, but, your bag is on fire.

CombustibleAssets's picture

Hey, reading ZH always gets me hot under the collar.

FrankIvy's picture


I don't know.  Hard to believe the U.S. will exist in its current state by then.

Pure Evil's picture

That's the whole point.

If you believe any of the crap printed on Alex Jones' Prison Planet, the crem de la crem of the elite world known to the pitchfork crowd as the Bilderberger group has decided that the global recession should continue for at least one more year.

And, as pointed out on ZH for the last year the whole run up in the ponzi markets is just a ruse to sucker in the, well, ahem, the suckers, before the Vampire Squid, et al, jump in and devour the victims like a school of piranhas.

With the whole end game being the development of regional governments controlled through the Master Blasters in the UN. Who control barter town?

With three regional spheres of influence including the North American Union, the European Union, and some Pan-Asian Union consisting of Japan, China and southeast asia.

Looks more like Oceana, Eurasia, and Eastasia to me.

cossack55's picture

Say PE. Would you happen to know the price of an acre of land next to the now defunct Yucca Mountain facility?

bugs_'s picture

Exactly no way this party goes on to 2040.


docj's picture

Bingo.  We don't even make it through the decade.

Collapse/Jubilee/Default/World-War-IV comes well before 2040.

RockyRacoon's picture

By 2012 we will have a new calendar anyhow.   Can't start a right and proper New World Order based on a stupid calendar based on whats-his-name's birth.  Gotta start all over.

akak's picture

When this whole false, debt-fueled and debt-filled economy AND monetary system finally collapses, somehow saying "I told you so!" to the innumerable sheep and corrupt establishment defenders will be small consolation.

I will, however, get a bit more satisfaction by then asking them:

"Got gold?"

BlackBeard's picture

hmmm... lots of hockeysticks....

Indeed, there are many gun owners here.

AssFire's picture

If you count the 5 trillion Fanny Mae (2008 figure) and add it to the 12.7T figure...

17.7 trillion/13.8trillion= 125%...(Greece is 108%)

Just by the acknowledged debts the game is over.

JW n FL's picture

Reagan ran up a 125% + National debt number and we made it 30 years post that event... but yes, this time its all over! this time is different!