On The Mean Reversion Of America's Luck, And Why Interest Outlays Are Really 30% Of US Revenues

Tyler Durden's picture

When discussing central planning, as manifested by the policies of the world's central banks, a recurring theme is the upcoming reversion to the mean: whether in economic data, in financial statistics, or, as Dylan Grice points out in his latest piece, in luck. While the mandate of every institution, whose existence depends on the perpetuation of the status quo, is to extend the amplitude of all such deviations from the trendline median, there is only so much that hope, myth and endless paper dilution can achieve. And alas for the US, whose 3.5% bond yields are, according to Grice, primarily due to "150% luck", the mean reversion is about to come crashing down with a vengeance after 30 years of rubber band stretching. The primary reason is that while the official percentage of interest expenditures as a portion of total government revenues is roughly 10% based on official propaganda data, the real number, factoring in gross interest expense, and assuming a reversion to the historic average debt yield of 5.8%, means that right now, the US government is already spending 30% of its revenues on gross interest payments! And what is worse, is that the chart has entered the parabolic phase. Once the convergence of theoretical and real rates happens, and all those who wonder who will buy US debt get their answer (which will happen once the 10 Year is trading at 6% or more), the inevitability of the US transition into the next phase of the "Weimar" experiment will become all too obvious. Because once the abovementioned percentage hits 50%, it is game over.

Below Grice lays out the framework for the disinflation delusion that has permeated the minds of all economists to the point where divergence from the mean is now taken as gospel:

What drove the disinflation of the last thirty years? Politicians would say it was because they granted their central banks independence. But the pioneering experiment here didn’t take place until ten years into the disinflation, when the Reserve Bank of New Zealand Act 1989 gave that central bank the sole mandate to pursue price stability. Macroeconomists would site breakthroughs in our understanding. Except there haven’t been any. Today’s hard money/soft money debate is identical to the Monetarist/Keynesian debate of the 1970s, the US bimetallism agitation of the late 19th century, and the Currency vs Banking School controversy in the UK during the 1840s.

Was it the de-unionisation of the workforce? The quiescence of oil markets since the two extreme shocks of the 70s? The dumping of cheap labour from Eastern Europe, China and India onto the global labour market? Technology enhanced productivity growth? Or maybe it was just because the CPI numbers are so heavily manipulated?

Maybe it was all of these things. Maybe it was none of these things … for the little that it’s worth, my theory is that no-one has an adequate theory, other than it being down to the usual combination of luck and judgment on the part of policymakers … or about 150% luck. The problem is luck mean-reverts. The mammoth fiscal challenges (see chart below) currently being shirked by the US political class suggest that mean-reversion is imminent.

Ireland is probably the best example of an entity for which the cognitive dissonance between an imaginary desired universe and a violent snapback to reality has finally manifested itself after a 30 year absence:

Ireland provides a good illustration. Today it’s going through a real and wrenching depression - there is no other word for it and it is heartbreaking to watch – partly because the terms of its bailout are so onerous. And what may well be the seeds of a future popular backlash against the euro can be detected in the election of Fine Gael on a ticket of renegotiating the bailout terms, which currently require them to pay a 5.8% rate of interest.

Unlike Ireland, the US still has the luxury of being able to stick its head deep in the sand of denial.

Look at the following chart showing two hundred years or so of US government borrowing costs. Two hundred years is a lengthy period of time. There have been economic booms and financial panics, localized wars and world wars, empires have risen and empires have fallen, technological change has made each successive generation’s world unrecognizable from that which preceded it. Yet government yields have remained broadly mean-reverting (and the US has been one of the best run economies over that time – other governments’ bond yields demonstrate an unpleasant historic skew towards large numbers). Coincidentally enough, the average rate of interest over that period has been around 5.8%, the rate which the new Irish government today says is ‘crippling.’

And here is the math that nobody in D.C. will ever dare touch with a ten foot pole as it will confirm beyond a reasonable doubt that the US is now well on its way to monetizing its future (read: not winning)

In other words, Ireland is so indebted that it is struggling to pay a rate of interest posterity would barely yawn at. But Ireland isn’t the only one.Take the US government, for example, which currently pays around 10% of its revenues on interest payments. This doesn’t sound too bad. The problem is that those federal government interest payments are calculated net of the coupons paid into federally run programs (e.g. social security) as these are deemed ‘intragovernment transfers.’ Yet those coupons to social security are made to fund a real obligation to American citizens and as such, represent payments on a real liability. On a gross basis the US government pays out 15% of its revenues on interest payments, which makes for less comfortable reading. So the net numbers remain the most widely quoted.

And where the figure gets downright ugly is if one assumes that in order to find buyers for the $4 trillion in debt over the next two years (once the Fed supposedly is out of the picture after June 30), rates revert to the mean. Which they will. What happens next is a cointoss on whether or not we enter a Weimar-style debt crunch.

Suppose the US government had to pay the 5.8% yield it has paid on average over the last two hundred years? The share of revenues spent on gross interest payments would be a staggering 30% (see chart above). If it had  to pay the 6.9% it’s paid on average since WW2, those gross interest payments would account for 37% of revenues. So it’s not difficult to see the potential for a dangerously self-reinforcing spiral of higher yields straining public finances, hurting confidence in the US governments’ ability to repay without inflating, leading to higher yields, etc.

Lastly, Grice makes it all too clear why we are now all screwed, and no matter how many Bernanke dog and pony shows we have, the final outcome is not a matter of if but when.

America’s political class might arrest the trend which threatens their government’s solvency (chart below). They might find a palatable solution to the healthcare system’s chronic underfunding. They might defy Churchill’s quip, and skip straight to doing the right thing. But if they don’t, such a spiral becomes a question of when and not if. And what would the Fed do then? Bernanke says the Fed “will not allow inflation to get above low and stable levels.” He says it has learned the lessons of the 1970s. He’s read the books. He can recite the theory. Yet a lifetime reading books about the Great Depression (and writing a few) didn’t help him spot the greatest credit inflation since that catastrophe any more than reading “The Ten Habits of Highly Successful People” would make him successful. It’s the doing that counts. So before lending to the US government for 3.5% over ten years, bear in mind that when it comes to a real inflation fight, not one of the Fed economists you’re betting on has ever been in one.

Our advice to the good doctor and his minions (not to mention all readers), is instead of reading multitudes of history books on the depression, on Japan, or on midget tossing (for those from the SEC), is to read one book. Just one. Link here.

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Michael's picture

Universal Bankruptcy Act of 2011. Book it!

Oh regional Indian's picture

Universal reversion to the mean. Book that. And while you are at it, look at that word.

Mean. I mean, how mean, eh? The balanced center is the same as :



offensive, selfish, or unaccommodating; nasty; malicious, small-minded or ignoble



Global reversion to the mean implies the following, to me:

1) Drastic reduction in population

2) Drastic reduction in availability (of most things), our current state of a-Bun-Dance is fake. An oily fake at that.

3) Purchasing power parity? Hah! That will be a tough one to swallow. So mean.

Personally, I say good. 

Better mean than late. or sorry. Than never. Or some such thing.






Snidley Whipsnae's picture

To paraphrase Greenspan... 'This economy is on the move (he means improving I assume) and the rise in oil prices are going to cripple US economic improvement'...

This is exactly what I expected the Fed/US Gov to say. They will claim that they had the economy on the mend and that the dust ups in the Mid East caused oil prices to increase and derail economic improvement in the US.

I call bs on this claim. Central banks around the world are printing fiat as fast as possible which is in turn causing commodities to rise...oil is a commoditiy and without oil the world as we know it stops.

As for Greenspans comments on gold 'some are uncomfortable with the problems with the Euro and Dollar'... No kidding? If some were not 'uncomfortable' with the fiat printing would the price of gold have increased 4 -5 times priced in these fiats? Do we need Greenspan to tell us the obvious? And his comment that 'this society is not ready for a return to a gold backed currency' ... disingenious at best. Those of 'this society' that are driving the price of PMs up are definitely ready for a return to a currency, PMs, that are a store of value. The remainder don't have a clue.

Backspin's picture

Right on, right on, and right on, Snidley.  Greenspan is as full of crap as he ever was.

About the dollar and the Euro, about all he could say was that they both had problems, and he tried to paint that as a good thing.  They are relatively stable vs. each other!  Woohoo!  What a joke.  How stable are they against a loaf of bread, Al?

And he said it would be incredibly complicated to return to a gold standard.  Wrong!  All we need to return to a gold standard is for the government to do nothing.  PM will emerge as the standard automatically.

And when Greenspan is asked about gold, he spends two minutes talking about Brent vs. WTIC spreads.

To think that I revered this guy at one time.  Glad the scales have fallen from my eyes.

RockyRacoon's picture

Looks like you are viewing things correctly.  With this:

And he said it would be incredibly complicated to return to a gold standard.

What Greenspan meant, of course, was that returning to a gold standard that the Fed/Gov't could manipulate and control is complicated. 

Pool Shark's picture

Well Played Snidely. This will be the party line:

"Don't blame the Fed; we had everything working perfectly until those darned unstable ME countries threw a mokey wrench into it."

Old. No. 7's picture

Perhaps the expiration of quantitative easing by June 2011 meme offers a clue as to when they expect  oil prices to cause the wheels to come off. I doubt it will take that long. Seems they've discovered a new tool to corral the long bond.

chinaguy's picture

The best things Economists do is explain the "unforeseen reasons" that caused their estimates to be 180' degrees wrong.

Meme Iamfurst's picture

Greenspan is an imbecil, a charlatan, a fake, a liar and cheat ( in my opinion).  Another emperor with no clothes.  Another Goldman consultant incase you didn't know.

His interest in Gold is a rue to make himself look important.  You don't need to be smart to see the sun rise.

Michael's picture

Has everyone seen these UFO videos from Jan 28, 2011 filmed by tourists hovering over the Dome of the Rock in Jerusalem?



2nd UFO Jerusalem Dome of the Rock Temple Mount UFO video surfaces from 01/28/2011.


Jerusalem UFO - 4th Video Synced with 1st and 2nd


Cool Huh?

gmrpeabody's picture

Too cool.

Have forwarded to all my tin foil friends.

Michael's picture

They only make aluminum foil these days. Tin is too expensive.

Sean7k's picture

Google it. It was exposed as a hoax. All kinds of camera mistakes and lighting mistakes. (I have a pretty big tin foil hat already, but you need to research this stuff)

Michael's picture

Yes the authorities are working feverishly to debunk this, but the reflection on the dome from the object is conclusive proof. Look closely as the ship goes up. That detail would take a lot of expertise to fake that.

5TH Video Witness of Jerusalem UFO over the Mount Zion and the Dome of the Rock-Temple


Sean7k's picture

Sorry, it is blatantly obvious.

Spalding_Smailes's picture

• Link • Youtube Video •

Israel-Times.com Technology - DragonFly Robot Micro UAVs


A life-size, robotic fly has taken flight at Harvard University. Weighing only 60 milligrams, with a wingspan of three centimeters, the tiny robot's movements are modeled on those of a real fly. While much work remains to be done on the mechanical insect, the researchers say that such small flying machines could one day be used as spies, or for detecting harmful chemicals.




INSPIRED by the biology of a bee and the insect’s hive behavior ...we aim to push advances in miniature robotics and the design of compact high-energy power sources; spur innovations in ultra-low-power computing and electronic “smart” sensors; and refine coordination algorithms to manage multiple, independent machines. 


Micromechanical Flying Insect (MFI) Project The goal of the micromechanical flying insect (MFI) project is to develop a 25 mm (wingtip-to-wingtip) device capable of sustained autonomous flight. The MFI is designed based on biomimetic principles to capture some of the exceptional flight performance achieved by true flies. The high performance of true flies is based on large forces generated by non-steady state aerodynamics, a high power-to-weight ratio motor system, and a high-speed control system with tightly integrated visual and inertial sensors. Our design analysis shows us that piezoelectric actuators and flexible thorax structures can provide the needed power density and wing stroke, and that adequate power can be supplied by lithium batteries charged by solar cells.


Spastica Rex's picture

One of the videos was a fake.


Oh - and I don't believe in aliens, ghosts, or bigfoot, just accuracy.

Michael's picture

The UFO enthusiasts are debunking the fakes they are showing on TV. I defer to the enthusiasts expertise.

Woppopotamus's picture

For the love of god, please stop posting useless junk in the comments.

Goldilocks's picture

How about something on organized crime ...

Here’s the new David Duke video … (it’s quite good) enjoy.

YouTube - Israel- The Promised Land for Organized Crime - 1 http://www.youtube.com/watch?v=2FdVck03_vc

YouTube - Israel- The Promised Land for Organized Crime – 2

YouTube - Israel- The Promised Land for Organized Crime - 3

velobabe's picture

i left you a reply on one of your blogs. not your driver, YOU†

Oh regional Indian's picture

Yep Velo, just saw your response. ;-) Bad ass indeed. I am.


Careless Whisper's picture

the US is now well on its way to monetizing its future (read: not winning)

correction: (read: a scam)

here's how it works:

the gov runs a defecit and then borrows money by issuing bonds. the federal reserve bank creates money out of thin air and uses it to buy the bonds, thus loaning money to the government. the government pays interest on the bonds to the federal reserve. at the end of the year, the profits (interest income) that the federal reserve earned, gets paid to the u.s. treasury. the government, in effect got an interest free loan and the money borrowed was created on the printing press. 

this is just a type of legalized scam and debases the currency.

wintermute's picture

Correct. The Bernank is prepared to buy the entire bondmarket. Then net interest will be zero.

He will plan yet another "exit strategy" to somehow sell all the Treasuries at a future date.

That date will never arrive as the buyers will never return.

Snidley Whipsnae's picture

+1... If Ben believes that he can continue to pay interest on bonds that is less than the rate of increase in commodity costs he is in for a shock. All FRN/US Bond holders that are receiving no return on investment over inflation will join in commodities speculation. The end game for this printing is a FRN that is worthless as a transaction currency for commodities. The dollar might be used for local US transactions, until it isn't, but will not be accepted for commodities purchases from abroad.

Precisely the reason that the US majority owned IMF is attempting to introduce the SDR as a world currency. The US would be allowed to trade dollars for SDRs and use the SDRs to purchase commodities from abroad...specifically oil.

Will this ploy work? Not if China/SCO introduces a competing gold backed currency with which to purchase commodities. The fireworks have yet to start...get PMs, popcorn and watch the show.

Backspin's picture

I'm wondering how long it will take this to play out.  6 months?  6 years?

I remember Marc Faber saying he thought the dollar was doomed "in 5 to 10 years".  That was a year ago.  More recently I heard Faber say four years, and Niall Ferguson say 2 to 4 years.

Personally, I'm surprised it has lasted this long.

I'll load up on some popcorn...


smlbizman's picture

after the fed removes about 6% {they do get paid for their service} than the rest is returned....so not quite interst free.....

Charlie Brown's picture

In fact, it's even worse.

As interest rise, the trade value of the Fed's bond holdings will fall, giving the Fed MASSIVE trading losses (it already has something like -$80 Billion worth of red ink in their most recent adventure). In fact, I say that the Fed is bankrupt at roughly 4.6% on the 10-year (it's hard to get really precise, although I do believe that my spreadsheets are close). This doesn't even count the Maiden Lane problem(s) -- (I don't even know how many Maiden Lanes there are anymore, I think the Fed is now up to ML4) -- and the rest of their toxic book is utterly incalculable.

One of these days, Tyler is going to post here that the Fed is, in fact, bankrupt -- and he'll be able to prove it by showing the actual trading losses for the Fed's Treasury holdings.

In other words, the Fed will eventually be forced to PRINT ITSELF SOLVENT.

I know most of you believe that I'm blowing smoke up your ass, here.

The sad, tragic, hopeless truth is that I'm not.

The fed will, ITSELF, end-up upside-down on their Treasury holdings.

Literally, the Fed itself will have a negative book value.

DoChenRollingBearing's picture

FED delenda est.  (H/T mick_richfield)

Show us the gold.

Meme Iamfurst's picture

 I know that you know that money is an IOU. So are bonds.  So we are printing IOU's to pay off IOU's, with IOU's.  No doubt in the very near future the Fed and government will proclaim a net profit on IOU's....of course it will be an illusion, but why worry about details.

Since Social Security is the whipping boy for having lent money ( IOU's) to the Treasury, I suggest that the Social Security Administration start buying Canadian bonds instead....sure fire way to hedge the dollar anyway.

Dr. Porkchop's picture

Dollars were derivatives of underlying value, now FRN are derivatives of 'the full faith and credit' of the US Treasury. The important thing to remember is that the value of the dollar and the value of the full faith and credit are not determined by the FED or Treasury. The market will speak.

Seasmoke's picture

all good things must come to an end........they always do

Dantzler's picture

Still the top goog hit searching on

"Universal Bankruptcy Act of 2011":


care to enlighten us ?

SubjectivObject's picture

Careful there, Ooogle's reading you.

Misean's picture

We just need another bubble.

Misean's picture

Alien USO's use these to down planes and ships in the Bermuda triangle.

snowball777's picture

That Cthulhu, such a kidder.

Spastica Rex's picture

Ph'nglui mglw'nafh Cthulhu R'lyeh wgah'nagl fhtagn!

Bicycle Repairman's picture

Good thing we have burnt up all of our easily accessible hydrocarbons.

snowball777's picture

In a just world, you'd be gasping for oxygen like the invertebrates at the PT boundary too.

Jasper M's picture

I just might take the under in that trade, for the intermediate term.

I agree with the author in the longer term. But, like so many Cassandras nowadays, he wants vindication Right Now. WHich may be a little early. 

Our financial house of cards is somewhat sturdier than the rest (e.g., Europe, Japan, China), if only due to the security guards. I think US Treasuries will likely get a bit of a reprieve.

I am think of SHY: The base 1% is actually competitive nowadays. 

Turd Ferguson's picture

The Law of Compounding Interest will get you every time.

Careless Whisper's picture

and if that don't get ya some scam on the street will.

everywhere i look someone is saying something about ishares silver trust (SLV) and it's not nice. here is one guy's analysis of their prospectus. any comments?



Snidley Whipsnae's picture

"The greatest shortcoming of the human race is our inability to understand the exponential function."


Everyone should take a minute to comprehend what Bartlett had to say...


umop episdn's picture

And, if you can't take a minute to read what Bartlett said, take some time to watch him give a lecture:


You don't have to listen to him for very long to get the idea. Exponential growth on a finite planet will end, voluntarily or involuntarily, and sooner than it 'seems.'