"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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CPL's picture

Won't be anyone's problem.  Eventually it horribly breaks and irrepairable because fundementals are just starting to be ignored now.  Right now the HFT's are 'playing' the rules written in pencil and can be changed at a moments notice.


When the rules are rewritten weekly and the bailouts are weekly.  We will all be holding onto our asses by that point though.

JohnG's picture



It's Calvinball:

1.2 Any player may declare a new rule at any point in the game. The player may do this audibly or silently depending on what zone (Refer to Rule 1.5) the player is in.

secret_sam's picture

        Eventually it horribly breaks...

Never let anything matter quite so much as "horribly," eh?

Gazooks's picture

knock-on effects ala 'colateral' valuation slips underlying 600 trillion$ in derivatives


there's horror potential algo squid should enjoy reaping

ball-and-chain's picture

But will interest rates get raised?

That's the million dollar question.

I don't think so.

10 years from now, they might be at 0 percent.

This could be the new normal.

Depressing.  But true.


PGR88's picture

Why so worried?   The USA's economy need only to grow at 10% per year, and the debt will be down to a manageable 80% of GDP by 2022.

Surely the USA can grow at 10% per year, with a proper Fed policies, Gov't central planning, and appropriate income redistribution??

Irelevant's picture

In other news, plane with 1.5 tons of tradition grounded in Istambul http://www.citifmonline.com/index.php?id=1.1220144

Silver Garbage Man's picture

The silver chart is going to be more impressive than that. That is a good thing.

bania's picture

I get Cougar Life ads on one side, and Christian Single ads on the other. I know these ads are targetted. What does this say about me?

Gypsyducks's picture

I believe that makes you eligible for promotion at the SEC.

Freddie's picture

He might be able to move up to a gig at the NY Fed.

Taint Boil's picture



Clean out your cookies.

Log back in.

Report your status.


* I clean the cookies after I visit Zero Hedge.

Really don't need to, what could possibly happe ...<snaaaap>

deeznutz's picture

it says 'get adblock'

CPL's picture

You've enjoyed entertainment from various websites in the past that dropped a cookie in your browser that told the google adword empire.  Adwords reviewed your browsing history by your mac address/ip address/browser cookie.  

With more processing power than any public or private enterprise on the planet and some of the smartest SME's in the fields of psychology, sociology, computer intereaction specialists, engineers and programmers.  This army of people developed AI to figure out what you needed to be offered based on past, near current and predicted future needs.   Which is your penitant need for women that know what they are doing, yet have a spiritual sense.


So after watching visual kinect naturalist art or Christain 40 year olf hawtie Ass Blasted, clear the cookies.  You'll see truck ads and twerps selling their investment services after a refresh.


So folks, remember clearing cache does not clean the cookies.

secret_sam's picture

Dude, that was righteous...

TheProphet's picture

You're a Republican member of Congress?

Democrats get a Cougar ad and another for teenage girls from Zoosk.

Raymond K Hessel's picture

Absolutely nothing... apparently, we are all getting this.  I think it's a psyop to distract away from ... .oh look boobies!!! 

secret_sam's picture

that last snorgigirl wasn't uh er...

ZeroAvatar's picture

Mentalo says, "I see bread and circuses in your future."



zilverreiger's picture

christians to the lions

lolmao500's picture

Yet all the pension funds continue to buy those crappy bonds.

Spigot's picture

P-Funds are basicly REQUIRED to invest in government bonds. They can not invest in much risk, by Statute.

dunce's picture

Gee whiz, who knew that the miracle of compound interest works both ways? Gad zooks, the comic book budget process might have a flaw.

secret_sam's picture

If it's too expensive to get grey ink right, switch to green.

Joe moneybags's picture

If I get the point of 1/2 of your posts, Secret Sam, I'll be elligible to join MENSA.

secret_sam's picture

Multidimensional in-jokes.

Back when Stan Lee invented The Hulk, he originally wanted the character to be grey.  The comic-printing process at the time wasn't sophisticated enough to produce a consistent grey color without paying a lot more than they wanted, so they switched him to green.

When it's more expensive to get contracts and laws and paper equities to "work" properly in the modern financial environment than it is to print money, the solution is similarly obvious.

Snakeeyes's picture

this is why Bernanke is going ape and will NOT stop easing. Or making trillion dollar platinum coins.


buzzsaw99's picture

Japan is the future for the usa. 1% on the 10y imminent imo.

VATICANT's picture

See you at the party Richter!

buzzsaw99's picture

What starts to look like a bond crash ends as a very ugly stock market crash thus preventing the former. The first move is always wrong and logic always fails in manipulated markets.

bilejones's picture

There's some truth in what you say, the question is , with a 1% interest rate, where does the money go?

Mr Lennon Hendrix's picture

Maybe Bernanke will pay the interest too.

Jason T's picture

70% of US debt today is the interest and it's projected we spend $5.89 trillion on net interest expense the next 10 years.  


Raymond_K_Hessel's picture

2022, ha! We will have long since debauched the currency by then!

ekm's picture

I've been telling you that Obama is quite close if not already have signed the executive order to tell PPT to crap the market, same as Bush in 2008.


If this doens't convince you, I don't know what else is going to convince you.

I'm not trying to convince Cullen Roche debating with ZH the other day on twitter as to why the Fed will ever unwind the balance sheet.




Everybodys All American's picture

... and that would accomplish just what for the Fed? Someone to sell there treasuries to I suppose is your argument. That just makes no sense to me. Granted some will be dumb enough to take on a treasury that pays around 2% for thirty yrs. but not me.

The Fed is in a pickle and it's eating all options including a paniced market.

ekm's picture

The Fed has become just a tool. They make no longer decisions. Decisions are made in the white house, whoever is behind Obama. Same as during Bush's time.


If the Fed keeps the bonds until maturity, it is practically its death. The Treasury will have to pay the Fed the principal........but ...how can the Treasury pay? So, the Fed and the Treasury become one in practise.

Moreover, the real economy touches no money like this.


Same as in 2008 when Bush and Hank Paulson organized the collapse because they had no choice, Obama and whoever will be the Treasury Sec, are forced to organize a collapse so they erase few trillions from the market.

secret_sam's picture

I think the folks who were making decisions "same as Bush's time" are largely the same folks...  That kinda sorta which means "the white house" isn't anything but another PR outlet puchased by dollas chasin' loot...

Er...did I mean to say that out loud?

laboratorymike's picture

I would buy a few of those bonds, for 0.0000000001 cents on the dollar. I can then stick my trillion dollar bonds next to my 100 trillion Zimbabwe dollar note in my fiat currency collection.

Atomizer's picture

Enjoy your insight always. He, she, or it can no longer unwind the balance sheet. The days of soft landing, FED putting the brakes on, and an exit strategy are gone. MSM will spin this into a national security crisis.

I welcome this crisis.  The only fear, if we don’t cooperate with more taxpayer looting.


ekm's picture

Thx a lot. Likewise.

The White House has no options. The extra liquidity sloshing around is creating crude oil and food hyperinflation.


They will erase few trillions in the market, by force, not by choice. Same as Bush. He didn't want to, but he was forced due to crude oil and food prices.


I think the decision was made in Nov 2011 when MFG was collapsed on purpose, but at the last moment something happened and they seem to have changed their mind and came up with the global bailout.

No wonder nobody's touching Corzine. He did what told, IMO.

Atomizer's picture

Agreed. I remember watching LIBOR unfold while flying down to Marco on 4th of July weekend. Was absolutely sick to myself. Today, I’m desensitized. These fuckers are going down. {they can laugh at our posts until the final day approaches} It will be done legally of course! :)

ekm's picture

Rule number 1 of collapses:



Mexican devaluation of 60% overnight is one of the best executed scenarios.

The night before the official devalue, the mexican gov declared live on tv that no devaluing will ever happen.

The gov does this to lure as many suckers as possible, everybody if possible, because they want to do this only once and pause for a long time.

Oldrepublic's picture

López Portillo "I will defend the peso like a dog!" said just before 1981 Mexican peso devaluation

MsCreant's picture

Sounds like he "screwed the pooch."

chubbar's picture

This doesn't hold together until 2022. Anyone watching the speed in which the gov't is destroying the constitution can see that we are less than a couple of years out from collapse.