"The Magic Of Compounding" - The Impact Of 1% Change In Rates On Total 2022 US Debt

Tyler Durden's picture

They say "be careful what you wish for", and they are right. Because, in the neverending story of the American "recovery" which, sadly, never comes (although in its place we keep getting now semiannual iterations of Quantitative Easing), the one recurring theme we hear over and over and over is to wait for the great rotation out of bonds and into stocks. Well, fine. Let it come. The question is what then and what happens to the US economy when rates do, finally and so overdue (for all those sellside analysts and media who have been a broken record on the topic for the past 3 years), go up. To answer just that question, which in a country that is currently at 103% debt/GDP and which will be at 109% by the end of 2013, we have decided to ignore the CBO's farcical models and come up with our own. Our model is painfully simple, and just to give our readers a hands on feel, we have opened up the excel file for everyone to tinker with (however, unlike the CBO, we do realize that when calculating average interest, one needs to have circular references enabled so please do that before you open the model).

Our assumptions are also painfully simple:

i) grow 2012 year end GDP of ~$16 trillion at what is now widely accepted as the 'New Normal' 1.5% growth rate (this can be easily adjusted in the model);

ii) assume the primary deficit is a conservative and generous 6% of GDP because America will never, repeat never, address the true cause of soaring deficits: i.e., spending, which will only grow in direct proportion with demographics but as we said, we are being generous (also adjustable), and

iii) sensitize for 3 interest rate scenarios: 2% blended cash interest; 3% blended cash interest and 5% blended cash interest.

And it is here that we get a reminder of a very key lesson, one that even the CBO admitted on Friday they had forgotten about, in what compounding truly looks like in a country that is far beyond the Reinhart-Rogoff critical threshold of 80% sovereign debt/GDP.

The bottom line: going from just 2% to 3% interest, will result in total 2022 debt rising from $31.4 trillion to $34.1 trillion; while "jumping" from 2% to just the long term historical average of 5%, would push total 2022 debt to increase by a whopping $9 trillion over the 2% interest rate base case to over $40 trillion in total debt!

Sadly, this is no "magic" - this is the reality that awaits the US.

And for those more curious about that other critical economic indicator, debt/GDP, the three scenarios result in the following 2022 debt/GDP ratios:

  • 2% interest - 169%;
  • 3% interest - 183.5%; and 
  • 5% interest - 217%, or just shy of where Japan is now.

Which reminds us: in the next few days we will recreate the same exercise for Japan's ¥1 quadrillion in total sovereign debt, which will show why any more "exuberance" arising from Abe's latest economic lunacy, will promptly send the country spiraling into that twilight zone where every dollar in tax revenue is used only to fund interest expense.

Once again, it is not our intention to predict what US GDP or debt/GDP will be in 2022: only the IMF can do that with decimal level precision, apparently, and not just with anyone, but Greece. The whole point is to show that when dealing with a debt trap lasting a decade, even the tiniest change in input conditions has profound implications on the final outcome. We invite readers to come up with their own wacky and wonderful projections of what the futures of the US may look like.

And that one should, indeed, be careful what one wishes for.

The results summarized for the three scenarios:

Total debt: 2013-2022.

Debt/GDP: 2013-2022:

The Zero Hedge open source model, for everyone to play around with, can be found here. Remember: don't be a CBO, enable circs!

P.S. don't even think of modelling a recession: everything Refs up then.

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IridiumRebel's picture

Put a fork in us.

boogerbently's picture

"New" interest rates apply to "new" loans or interest.

The infaltion they are trying to trigger will (down the road) allow us to pay "old/lower" interest, with more income/dollars.


Tyler Durden's picture

And "old" rates apply to "old" loans and interest - all debt issued before 2008 has cash interest that is not ZIRP, and the bulk of it is far from maturity. The fulcrum point of temporal low rates in the context of inflation, will come and go in a heartbeat.

dexter bland's picture

I would look for a rotation out of bonds AND out of stocks (though probably starting with the bonds). The prices of these asset classes aren't so inversely correlated these days, sometimes they are positively correlated.

Higher rates will have quite scary consequences for an economy hooked on cheap money: housing, consumer spending, fiscal deficit, dividends etc, not exactly an equity friendly environment.

trav777's picture

the Fed will just have to print more, won't they?

Amazing how the first term of this joke President featured (according to Treasurydirect) an increase of about $6T in debt and nobody says much of squat about it.

Stuck on Zero's picture

Printing will solve all the problems.  It will simply be a race between the printer and the interest rates.  I suspect the printer will win even if interest rates go to infinity.


socalbeach's picture

I still say you have to subtract off intra-governmental debt holdings of $4.8+ trillion from the widely quoted figure of $16+ trillion in total debt.  I would add the SS and Medicare spending to the debt when it occurs, as the promises made to seniors can be changed or reneged on.

Secondly I would subtract some fraction of the monetary base from total debt since the Treasuries the Fed has purchased have been effectively retired.  A case could be made that the total amt of MBS purchased should be subtracted as well, since the interest the Fed receives from those are remitted back to the Treasury, but maybe not.  It's not clear to me if there is any net MBS interest as the Fed may have overpaid for those securities and/or purchased bad loans which will cause a loss overcoming any interest received.

One can see from the following link that interest rates and interest expense for the fed gov't are going down, and the chart doesn't even take into account interest rebates from the Fed which I understand were close to $100 billion for 2012.


That's not to say things are going to be a-ok, I'm expecting continued if not accelerated price inflation if the fed gov't doesn't drastically cut back on spending.

secret_sam's picture

          interest rates and interest expense for the fed gov't are going down

How low can the Fed keep rates at $160B/month in bond purchases?


OH!  Just for the hell of "crazy speculative stuff" what happens if the FEDGOV deficit becomes zero overnight?

socalbeach's picture

I come up with net interest expense as a percentage of revenue for the Fed gov't of only about 5.3% given the following figures (billions).  I don't have any economic models that would allow me to predict what would happen with the scenarios you propose.

222.47 = total interest expense

80 = Federal Reserve interest rebates

2,671.3 = total revenue

5.3% = 100 * (222.47 - 80) / 2,617.3

Interest expense


Interest rebates

So obviously the US gov't has a spending problem but the interest expense isn't significant yet.  How about cutting back on military spending?


TwoShortPlanks's picture

After reading much of the blood and guts of Holdren's Ecoscience (1977) this feels kinda like Triage in Lifeboat Ethics.

A series of bubbles and pops to lever-up and fleece the sheeple, GFC to make excuses/blame, 5 years of ZIRP/QE's, Stimulus, Bail Outs (No prosecutions to speak of; as if all the puppets were doing exactly what they were meant to be doing), re-cap banks but fuck the public, Eastern Gold buying habits, integration of Iraq and Libya, de-weaponing the US, Sustainable Development (Agenda 21)....hmmmm, ugly thoughts are appearing....could everyone be in on it but the sheep?

Did Holdren's white paper kick-start a secret revolution?

Panafrican Funktron Robot's picture

Your general point here is well made, nominal deficits can be pretty easily handled with nominal Fed action.  Mind you, these actions can do quite a number to what is reported as real wealth, but then again, real wealth is probably massively overestimated when you back out all the ponzi bullshit.  The only thing that's actually important is that deficit spending is a great, great way to accelerate the transfer of public wealth to private hands, and the debt, the more power those private hands have over the public wealth.  Ergo, debt will, for sure, keep increasing, and deficit spending will remain high.  That's the alpha and omega of it.  

Panafrican Funktron Robot's picture

The other point is that the buyers/holders of debt aren't necessarily interested in seeing a return on that investment at face value (except the plebs, and who gives a fuck about them, right?).  They're buying influence.  Influence can get you real assets at incredible bargains, with a government guarantee.  The slap on the wrist for B of A today is a really great example.  

trillion_dollar_deficit's picture

Nobody says squat about it because we dont have a spending problem. At least according to ObAmA+:




AssFire's picture

Ineptocracy (in-ep-toc'-ra-cy) - a system of government where the least capable to lead are elected by the least capable of producing, and where the members of society least likely to sustain themselves or succeed, are rewarded with goods and services paid for by the confiscated wealth of a diminishing number of producers.

Uber Vandal's picture

Sounds an awful lot like the movie Idiocracy.




smlbizman's picture

so whats the number when we dont give a fuck anymore.......whats the over/under on this rotting fish....how about closest to the pin with year and month than amount that finally according to the tylers turns the lights out.....winner gets fitty bucks.......

DaveyJones's picture

That's brilliant - a new number called "don't give a fuck anymore"

I raise one to you

No number was ever better named.

wtf.gov's picture

"Zero fucks given" would be approriate.

michael_engineer's picture

Since we don't really need the debt, lets just stop paying interest on it, and from now on only pay for real things that we really need.

lewy14's picture

What could possibly go wrong?

Heavy's picture

fake money could eat itself

DaveyJones's picture

each new guy will have to outdo the other until this place blows

sansnobel's picture

No shit Trav, what part of  "we have a printing press" do these fucking morons who are short bonds don't understand?  You people will get nothing on your fucking precious money.  I flew with some fucking moron a few years back that thought the Fed only had a very small influence on the Treasury curve.  That has been John Maynard Keynes' wet dream from the git go.  The elimination of the "rentier class".  The only thing that will show the fucking communists the fucking reality is for everybody in America to pull out of fucking banks because the Gov. is pushing 30yr war bonds at .02% when real inflation is at 8-10%  this country is fucking hopeless.

merizobeach's picture

"this country is fucking hopeless."

Yass! Yass! Save yourselves and GTFO. (But nearly no one will.)

TerminalDebt's picture

yeah yeah, people have been saying that for years now, and will keep saying it for years to come.

It's like the guy on the street corner crying "the end is here, repent"

merizobeach's picture

Whatever, dude.  I G-myself-TFO in '96 and have thanked myself for that ever since.

agent default's picture

Printing will cause people to dump the USD, and get out of Treasuries even faster so interest rates rise even further.  Anybody done the calculation with 8% or 10% interest rates?  It's mind boggling.

Panafrican Funktron Robot's picture

"Printing will cause people to dump the USD"

Odd, then, that people still buy the Yen.  Or the Euro.  Or any number of other currencies with the printing presses stuck firmly in the "on" position.

The only thing that will actually collapse the system is for people to remove themselves (to the greatest extent possible) from fiat regimes.  The good news is that only a very small percentage of people is actually needed to accomplish this.  The bad news is that a depressingly tiny percentage have actually done it so far. 

Cycle's picture

A Minsky moment is the economic phenomenon that occurs when over-indebted investors are forced to sell good assets to pay back their loans, causing sharp declines in financial markets and jumps in demand for cash.[1][2]

secret_sam's picture

"D'oh!" --Homer Simpson

Karlus's picture

The reality is the debt we owe the Chinese and Saudis will never be paid.

In the case of the Arabs, they know, but its the cost of us defending them. They blow money on Lambos and some vaca for nephews, but their savings (debt held) really worthless to them.

The really interesting part is the Chinese. Can they build a middle class before we default them? Its a race, they cant go to war with us because of Tridents, so they wait until currency collapse and to see what Vladimir (or whoever Runs Russia) will do. In the confusion of our default (or our Civil War 2) they grab Japan whilst the Indians and Pakis nook each other.

Long term, USA is a winner, because we are isolated, have resources to the north and south, along with natty and water, we survive.

Hows that?

Bee's picture

Still not very pleasant.  Even though we survive we probably degenerate into one of the following:

Tyranny with heavy handed central government, mass poverty, starvation and loss of personal freedoms.

Tribalism, fragmentation.  Fear, revenge and counter-revenge dominate. 

FL_Conservative's picture

Are P/E ratios really elastic as moderate-to-hyperinflation kicks in?  That seems to be the "educated" thinking on the matter. Me doesn't think it works like that.

GMadScientist's picture

These days, I'd be more concerned about the divisor and the effect of inflation on margins with respect to same.

vast-dom's picture

the question is for whom the "old" rates apply and who is paying and not paying and how is it all being written off and or subsidized and or refinanced.

knukles's picture

Other side of the curtain and just as unsustainable, is that the Fed'll be buying all the new issuance and interest payments thereupon are rebated back to Treasury....

Either way the whole bloody thing is on tenterhooks as is and looking poorly....especially with nitwits possessing particularly influential bully pulpits like Krugman convincing the economic and financially Illiteratis that the Platinum Coin Quick Fix is entirely reasonable and responsible.

Not to mention Mrs LeGarde (sp? Frog at the IMF) now blubbering on about the debt ceiling being a potential cause for Global Economic Collapse.

We're all so screwed.  As Tricky Dicky was reputed to have said to H.S.Thompson, something like "Doomed.  Doomed I say.  We're all fucking Doomed. 

JohnG's picture



The same banks that control Washington now did then as well, only under different banners.

Old Dick knew what would happen when he finished what FDR started.



...he was right.


ozzz169's picture

not to mention that this year we are rolling over 3 trillion plus the 1 trillion in new debt, so only 4 trillion to sell. "old" loans become new loans pretty fast but don't worry the fed will own all the debt before too long, and all the "profits" will be put back in the treasury so who cares what the rates are will be irrelevant.   And boom goes the dynamite

cranky-old-geezer's picture



Nonsense, there will be no rise in rates from now on, it's truly an end game.

What will happen is curency collapse from all the printing to fund all the new debt ...at ZIRP ...and keep buying shit from banks, etc.

It's called "looting a nation (to poverty)"  ...something you seem reluctant to talk about.  

MeelionDollerBogus's picture

who the fuck gave you a +1?

I mean really, you just told off one of the Tylers for NOT mentioning enough looting, or taking enough of a hard stance on it?


I know I'm caricaturizing but would you call Scrooge McDuck by the name Jon Nadler?

vast-dom's picture

Historical rates you say? History is no longer applicable. Neither is logic, accounting, fundamentals, P/E, playing with charts, or anything else. 

Supernova Born's picture

The Republicans' agreement on the fiscal cliff took away the Bernank's pre-scripted excuse for a continuing/further deterioration in economic conditions. He needed a new one.

The next day? Bernank states rates won't stay low.

Bernank knows a depression is at hand, he has to have "cover " and he'll make up whatever cover story he needs for what his actions preordained.

philipat's picture

Simple, that means 40 Platinum coins. Next......

logically possible's picture

I prefer to call them platinum zimbabwes.

Eireann go Brach's picture

Obama and Bernanke both grunt at their wives, this will be someone else's problems by then!