Charting The Treasury's Delusions: Tim Geithner's Latest Projections For US Public Debt
One of the events that received absolutely no mention last week was the sneakily announced Treasury annual report on public debt this past Friday, alongside the horrendous NFP report. Luckily, courtesy of Congressman Dave Kamp, we have managed to obtain this report which shows the unprecedented level of delusion that exists at all levels of our administration. In a nutshell, the attached report pretends to forecast US debt and GDP levels. What it doesn't pretend to do, is to be the work product of a variety of pathological liars. Even as Geithner anticipates US total debt to hit $19.6 trillion by the end of 2015, somehow, in some parallel universe, he also anticipates US GDP will rise at a 5% CAGR for the next five years! Total US GDP, which was at $14.2 trillion for 2009, is expected to ramp up by 2.7% in 2010, and then really put on the afterburners in 2011 through 2015, averaging almost 6% each year, and hitting a stunning $19.2 trillion in 2015. The ridiculousness of this assumption is beyond comprehension. And even so, total debt/GDP will still be over 100% per the government's baseline assumptions. Alternatively, if one assumes, as PIMCO does, a GDP growth rate of 1.5% for the next 4-5 years courtesy of the 10% unemployment "new normal", total debt-GDP will hit 126% in 5 years. And this obviously excludes GSE, SSN and Medicare off balance sheet debt. Lastly, the Treasury assumes that even with 100% Debt to GDP, the funding cost on US market debt in 2015 will be only 4.7%, compared to the 1990-2009 average of 5.9%.
The chart below shows the US Treasury's baseline estimate. Keep in mind total debt will realistically be much higher than what is projected here. One notable observation is that the Treasury assumes that Intergovernmental Debt (i.e. funding for trust funds such as SSN etc), will only rise at around 4.5% each year. This is another chimera that will promptly blow up in the administration's face, now that SSN is net cashflow negative for the first time in history, and will need constant cash replenishment from the Treasury.
So far so good. Where things get very surreal is when the government attempts to project GDP for the next five years. As the chart below shows, Geithner believes that after a minor dip in 2009, GDP will continue growing, and in fact, for four of the projected years, overtake the 1990-2009 average of 4.9%!
So instead of taking the government's word for GDP growth, we have decided to adjust the growth rate at a fixed 1.5%. We show the resulting Debt-to-GDP ratio below for both the government's baseline and our adjusted case. The difference in 2015 is material: 101% versus 126%.
The previous chart ties in directly with the next set of critical data: the government's expected all-in blended interest rate on the marketable debt. As the chart below demonstrates, the Treasury anticipates having interest expense outlays exploding from $201.5 billion in 2009 to $653.6 billion. Yet even that amount is a mere 4.7% of the total projected outstanding marketable debt in 2015, which is well-below the 5.9% the US paid in interest on its debt between 1990 and 2019, when debt-to-GDP peaked at 83%.
Here once again we construct a more draconian scenario, in which we assume that the interest rate on debt increases at 1% each year after 2009, starting at 4% in 2010 and growing until it hits 9% in 2015. As the chart below shows, the result of this scenario would be a catastrophe for the US and its already untenable budget.
Our take home from this compendium of incredulous data, is that there is no way in hell for the US to hit any of its estimates for future funding and outflow, except for one case: if the US continues to be the capital safe haven for the next five years. This means that it will be in the US' interest to generate ongoing solvency, liquidity and geopolitical tensions for the next 5 years and likely much longer. Another benefit - the US defense sector's taxable net incomes will soar. All this is completely independent of any debate on whether the US will see inflation or deflation. As we have seen over the past year, even as stocks have been incorrectly pricing in a return of moderate inflation, Treasury rates have hit record lows, primarily as the fixed income market has continued seeing Treasuries as the last safe refuge. Look for this to only become more acute as increasingly more baby boomers retire. Yet the one virtually certain component of the UST's forecast is that conflict and international "contagion" will be a critical part of the equation should the Treasury wish to retain any semblance of control over its even near-term projections. How much of this will be accelerated by the administration, is a topic for another day.