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US Debt-To-GDP Of 159% In 2020? How US Debt Issuance Is Vastly Greater Than Deficit Spending
Lately we have gotten notification from both the CBO and independent economists that America's fiscal lack of responsibility will saddle the country with trillions in future deficits, roughly around $10 trillion in 10 years. Yet this is only half the story. Contrary to expectations that every dollar in deficit spending is funded with a dollar of debt, historical data indicates that actual debt-funded spending vastly exceeds monthly deficits. In fact, since the beginning of Fiscal 2007 (October 2006), the total cumulative deficit is $3 trillion. It may come as a surprise to some that over the same period, total US debt has increased not by $3 trillion (which would make intuitive sense), but nearly 50% more, by $4.4 trillion, meaning that the US Treasury has accumulated approximately $34 billion of debt in excess of any given month's average deficit. This means that should this trend persist, the $10 trillion in deficits over the next 10 years, will translate into roughly $15 trillion in new debt. Adding this amount to today's existing total debt of $12.9 trillion means that by 2020, the US will be saddled with $28 trillion in debt, or roughly double today's GDP. As this is a 9% CAGR, it means that GDP will need to increase by about 7% annually just to stay at about 100% debt/GDP in 2020: a ludicrous assumption. A more realistic one, in which US GDP increases by 2.5% each year, leads to a 2020 Debt-To-GDP ratio of 151%. Welcome to the new normal.
The chart below demonstrates the difference between cumulative deficits over the past 43 monthly periods, superimposed on the total debt issuance over the same period. As is plainly evident, the two lines diverge rather rapidly.
Presenting the same data on a non-cumulative monhhly basis demonstrates that out of the 43 periods, debt issuance has been greater than any given period's deficit on 25 occasions. As noted previously, the total cumulative divergence between the two data series amounts to just over $1.4 trillion during this period.
A simple exercise in divergent statistics indicates that total debt has surpassed total deficits by 48.2% over this period. In other words, assuming the latest CBO figure of a $10 trillion deficit over the next 10 years is correct, we will likely see $14.82 trillion in new debt issued, thus bringing the 2020 debt to a grand total of $27.7 trillion (when added to today's total of $12.9 trillion, which means a Compounded Annual Growth Rate in the US debt of 8.9% for the next 10 years.
So with everyone recently transfixed by such fractions as Debt/GDP ratios, we decided to project what the US debt-to-GDP ratio would look like, assuming two scenarios for US growth: a baseline 2% annual GDP growth until 2020, and an upside 2.5% growth rate. The results are not pleasant. In the base case, we see US Debt/GDP hitting 159% by 2020. In the upside case, this number is a much more "bearable" 154%. Surely these numbers merit a AAA rating by the rating agencies.
Of course, none of these numbers assume that the $6.3 trillion in GSE debt will be onboarded, as the government will never recognize just how bad its off-balance sheet picture truly is. If GSE debt were to be added to the total debt tally (kept constant through 2020), total Debt/GDP would be 186% in the base case, and 195% in the upside case. Should we add the roughly $80 trillion in other unfunded liabilities such as SSN and Medicare... well, you get the picture.
And here we are worried about what European contagion could look like a few years down the line.
h/t Mike Cornips
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"And here we are worried about what European contagion could look like a few years down the line."
And the alternative is to collapse this second.
The current US system is $52.4T(Q4) down from $52.9T(Q1) see Federal Reserve Z1 report. The credit creation machine is going backwards, one problem with that, it doesn't run backwards, it collapses.
For 2009, if you eliminated credit creation from the federal government of $1.45T, the system would be running at a negative $2T rate. Sorry, no way the system would have survived. All they are doing is buying a little more time.
The end results has always been known. Contagion started in the US in 2007 when US consumers peaked at requesting the commerial banks to create new credit... in 2007 it was at $4.7T rate annualized, now it is at a (negative)-$600B rate annualized.
Bitching about the government spending is not going to save anything, that's a pipedream. Pull the government creation, the next morning Road Warrior. It's going to happen anyway but blaming the symptom seems kind of futile.
http://www.federalreserve.gov/releases/z1/current/z1.pdf
see page 67
Mako would you please share your website with me again
I forgot to backup my favorite while formating the computer
Thankyou
Relax the Fed will forgive most of this debt. Once this happens we will start to recover. It's the only way.
Yeah, probbaly. But by then inflation will run at triple-digits and DOW at 36 000.
http://theautomaticearth.blogspot.com/2010/05/may-16-2010-oil-credit-and...
Stoneleigh: I disagree. I think we will see $20 oil, but only because of a massive fall in aggregate demand due to the evaporation of purchasing power. $20 oil will not be cheap oil. On the contrary, it will seem very expensive to most people.
That is what deflation does - prices fall but purchasing power falls faster, making almost everything less affordable. As a much larger percentage of a much smaller money supply will be chasing the essentials, they will receive relative price support, meaning that their price will fall less than everything else, so the essentials will be the least affordable of all.
As with many things, demand collapse sets up a supply collapse and a resource grab, so we could see oil go from $20 to $500, if in fact there is any oil left on the open market at all by that point. Since oil IS hegemonic power in a very dangerous world, that may not be the case.
Prices can rise in a deflation if there is a sufficient shortage of a critical good (just as they can fall in inflationary times if there is a sufficient surplus or production costs are falling rapidly). If prices are rising in nominal terms, they are going through the roof in real terms against a backdrop of a collapsing money supply.
Stoneleigh: By the time we have oil shortages, we won't have any credit-fueled demand because there will be no credit. First we lose the credit, which cripples purchasing power, then we lose demand (where demand is not "what you want", but "what you can pay for"). We'll have a temporary glut of oil, which will kill investment.
The lack of investment in new production, and lack of money for maintenance of existing equipment, and potential sabotage of existing equipment by those with nothing left to lose, set up a supply crunch. By that point very few have any purchasing power at all, and none of it credit-based, but governments and their militaries will be chasing down whatever is available for their own use (and hoarding where possible).
The Fed does not eliminate debt. The credit system collapses, no further credit is produced, people get liquidate.
Economics 101, if you can fund your own debt there is no reason for the credit to be produced. It would never exist. Numbers in a computer are not credit, people lend and borrow, not computers.
"There is no out, there is only in"
2020... that is more then 3 presidents away from now!
You assume that you will unseat the present Nigerian idiot who is buried like a tick into that office? Elections? We shall see...
They win when you focus on the wrong guy.
They want us to focus on BO just like they wanted us to focus on GWB.
Same game, different players, wash, rinse, repeat. (which is where LOST is headed IMHO)
Focus on the real power and then maybe we can start to fix this mess.
Sudden Debt
Or one coup.
It amazes me that these clowns are too myopic to get the contemporary budget correct, but they miraculously have 2020 vision?
Nice joke. Never forget though these guys have to produce stuff to earn their life.
Who will remember that in 2020? Very few people. Meanwhile, here's the cash! And that is not because they are going to be wrong they will have to pay back their salary for unproficiency. The job is good, the money is good.
It amazes me that these clowns are too myopic to get the contemporary budget correct, but they miraculously have 2020 vision?
Wise observation!
Hey, it's Washington. They have a view for everything, and they are rarely right.
But nobody keeps score, they just go on to the next thing before the last thing played out. Such a method is known to insiders as "self preservation."
The good news is that when Obama is dumped these numbers will come way down. But, discipline must become the mantra, not entitlement.
i think you typoed some billions instead of trillions under the second chart.
billions are so 2009 now
The year 2020 does not matter. As long as the printing presses are still running all we are concerned about is today and Debt/GDP ratios in the future are meaningless. We will grow our way out of this and we have a central bank which can simply print more dollars to buy (indirectly of course, lest someone say we are monetizing debt) treasuries ad infinitum. As long as the EURO is trashed the dollar is king.
Long live the dollar!!
In the normal insane world debit equals credit. So where is the entry for the unaccounted for fiatscos?
In the lying, cheating, insane beyond surreal world (government) the "consensus" answer is: "Only an un-American rabble rouser would ask such a question. Please remove the Gentleman from the chamber."
November incumbent bloodbath. Please help any way you can.
I was thinking the same. Where is the balancing entry?. Someone mentioned in another thread that the US does not include debt service cost in the deficit numbers as opposed to Europe. Is the missing part interest payments on existing debt?
Good point. That's what I was thinking. The $34 billion delta per month calculates to about $408 billion per year, which is not far from the current annual debt service. thus, TD's numbers probably need revision upward as we approach 2020, since it's certain that debt service will increase as the US goes to junk status. That is, if this way of looking at the numbers is correct.
USA is the New Greece.
...hey but they have the nukes!
DR 103
Never will be equaled
Nah, the US is much worse. You guys will do fine once you finish fighting it out.
No surprise here. All these numbers are fraudulently reported, because they merely account for cash flow (it has little to do with "real" assets-and-liability accounting).
We issue bonds TODAY to cover Social Security TODAY. Ditto with debt roll-overs. If we actually considered current liabilities (like Fannie & Freddie), then these numbers make perfect sense. Since Fannie & Freddie are currently not liabilities according to today's debt numbers, it's a "surprise" that bonds are issued this week to subsidize F&F cash flow needs.
The reality is far worse: The article is entirely correct from a symptomatic point of view (surprisingly higher-than-expected-and-budgeted costs), but these are in actuality not a surprise. We're looking at exponential progressions. This is called a parabolic blowout.
US Sovereign default is imminent, but the EU and UK get to default first.
"total US debt has increased not by $3 trillion (which would make intuitive sense), but nearly 50% more, by $4.4 trillion, meaning that the US Treasury has accumulated approximately $34 billion of debt in excess of any given month's average deficit."
So where did the extra $1.4 Trillion come from?
Probably Fannie and Freddie which is not included in the totals most likely as the FED likes to hide that crap. If the American people knew(and hopefully the audit is done soon that was approved by Congress last week) what the FED was hiding, there is going to be outrage in the public.
Say goodbye to the Euro, its rolling over like a stuck PIIG now. I still say we see 1.20 this week. Then we will see Goldman claim they were short the whole time and never buying dips. Do the opposite of what Goldman does from now on, they are on the worldwide shit list and no one is listening to the crooks anymore.
Debt-to-GDP is a ludicrous way to look at a countries debt. GDP cannot be taxed at 100% nor can it be taxed at 50%. In fact, only a small portion of GDP can be taxed mostly because GDP, in general, is gimmickry. You want a truly scary picture, look at debt to tax receipts and projected tax receipts, which is how one should always look at a countries debt since that is their revenue after all. In other words, stop perpetuating the debt-to-GDP statistic as it makes as much sense as comparing my dog's ass to Heidi Klum's ass.
That is too scarey....hence the debt to GDP.
Amen, thanks for saying that. If total income receipts for the USA are about $2.2 T (about right) and the budget is $3.5 T, then we're not far now from 150% of the relevant metric. GDP includes government spending, so it's a circular way of measuring things: the money the govt. is spending can be counted toward the money the government has available to spend (again). Nutso.
Who really trusts GDP #'s? It is all a shell game. I don't trust a corrupt weather man to tell me which way the wind blows.
I don't. I don't think claiming the U.S. debt-to-GDP number is under 100% right now is credible either.
Sheesh, who cares how much debt we rack up??
Investors around the globe are clamoring for more of our Treasuries. The demand is voracious...
Check out the yields today:
COUPON MATURITYDATE CURRENT
PRICE/YIELD PRICE/YIELD
CHANGE TIME 3-Month 0.000 08/19/2010 0.15
/
.16 -0.006 / -.006 11:00 6-Month 0.000 11/18/2010 0.22
/
.23 -0.002 / -.002 11:00 12-Month 0.000 05/05/2011 0.33
/
.34 -0.004 / -.004 11:00 2-Year 1.000 04/30/2012 100-13½
/
.78 0-01 / -.016 11:00 3-Year 1.375 05/15/2013 100-08+
/
1.28 0-02+ / -.027 11:03 5-Year 2.500 04/30/2015 101-19+
/
2.16 0-06+ / -.043 11:08 7-Year 3.125 04/30/2017 101-20
/
2.87 0-08 / -.040 11:07 10-Year 3.500 05/15/2020 100-16+
/
3.44 0-13½ / -.050 11:06 30-Year 4.375 05/15/2040 101-08
/
4.30 0-31½ / -.059 11:07
Sure, racking up debt is so cool, isnt it?
Not only that, our currency is currently going vertical....
the explanation is very simple, the deficit numbers you are looking at don't include net acquisitions of financial assets or growth of intragovernmental debt.
I really believe that we have dug a debt hole that we will never be able to get out of. The only permanent resolution I can think of would be a complete economic reset (war, internal collapse, invasion, etc.). God help us all.
Yep Brian, Ive been saying the same for months now, protract out all these scenarios and the only conclusion can be collapse and world war....theyve got to wipe those books clean and that can only be done with all-out millions dead war. God help us all!
The people (i.e. the shareholders) could takeover (or overthrow) their respective government and DISOLVE the government (and their government debt contracts) and INCORPORATE a new government with no continuance of the debt obligations. As long as the lender's military isn't begger than the borrower's this could work, no?
The poorer the country, the more likely it is that debt repayments are being extracted directly from people who neither contracted the loans nor received any of the money.
Even the sickest, most addicted gambler, at some point realizes he is fucked. Once Timmay and Benwah finally get there, look out boys and girls. There will policies and shenanigans unleashed upon us that we cannot even imagine.
Thank you for reminding me to get back to studying Chinese...
Just set all algorithms, chart indicators, and research articles on 30 second reversal timeline....whatever anything shows will change within that time period or sooner! As a trader friend of mine BB'd me a few minutes ago- 'OMFG please knee gar, PLEASE'!!
Tim? Ben here. What the fuck are you guys doing over at Treasury. The Dow's down 50, dammit.
demsco @ 350834 has the right of it. We have nothing to fear but fear itself. For the way forward a much better way of figuring out the ability to issue debt should be one based on tax receipts. We can use GDP as a metric. Tax receipts are 30% of GDP, expenditure is 40% of GDP, current debt is 90% of GDP.
I think you will find that debt has been going up faster than expenditure for decades as the Government parks bonds into Medicare/Medicaid trust funds, plus more recently the chump change that goes for Fraudie and Funny losses.
What we need to do is consider two factors.
One is the interest rate. After all in todays Ponzi farcisistic (Marla's new real politik) state the Fed picks the rate at which the largest drain on resources (the Government, i.e. we the people) borrow. A bit circular, but we do own the Government and they borrow on our behalf, not anyone elses, to fund spending on us, not anyone else.
Debt @90% of GDP with 3% weighted average government bond yields = 2.7% of GDP and 2.7%/30% of GDP for tax receipts = c.10% of tax receipts going to pay the interest bill. This seems affordable.
Debt (in ten years) @ 150% of GDP with a bit of a crunch in government funding and average 6% government bond yields and the tax take still at 30% of GDP results in 9%/30% = 30% of tax receipts. This is Greeces problem and the US's future problem.
The other factor is what I call the draw down rate. It relates to the need for money back by the investors in Government bonds and comes on top of the interest rate. I calculate the draw down rate at around 5% per annum. And I use a rule of thumb of 20 years in retirement as a catch all. (Capital being "drawn down" at 5% for 20 years = 100%). Investors in treasuries want their principal back at the rate of 5% per annum, so they can eat it or be treated for health or to pend on infrastructure. Call it the reverse of the Ponzi scheme, since it is has a cumulative effect.
It doesn't matter what the Fed Funds rate is, or the weighted average Treasury bond yield. This drawdown rate is compulsory and is funded by borrowing (replacing) maturing Treasury bonds. Although it is unrelated to GDP, we can use GDP as a base currency. If debt is 150% of GDP, then the impact on GDP is 7.5% per annum. This 7.5% of GDP can be expressed in term of the tax take of 30% of tax receipts as 25% of tax.
If you combine this drawdown with the debt servicing cost you come to over half of tax receipts for 2015 already spent. This means that all Government spending has to come down by 50% today.
That is the solution. Its called living within your means. We need a 50% cut in Government spending TODAY, to provide 10% of GDP per annum for a period of time. How long? Well until that time where our politicians have a job. That is, when our politicians actually have a discetionary budget. I would say that is around ten years. Japan needs 20 years, Europe (including the UK) also need around 10-15 years.