"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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Atomizer's picture

2022 is a tooth fairy fantasy drummed up by 'kicking the can down the road' steering committee.  Once these fuckers take the death by natural causes 'dirt nap', all bets are off for dented economy can!

yogibear's picture

This is why Bernanke and the Federal Reserve bankster can't stop QE and buying US debt. What other fools want US treasury bills?

A few other countries have wised up.

Wait until there is a rush of US dollars (dollar dumping) into the US. 

Catullus's picture

I see it's the new Bizarro version of Excel.

Where's the model where I pull the cells across to show my company's earnings growth? I need to push that up against the 12x, 15x, and 30x EBITDA assumptions.

lizzy36's picture

What?? You made a model? 

Don't you know the success of financial bloggers is predicated on FRED charts, slideshows, and coming up with ridiclous ideas about coins and the debt ceiling and then going on tv and making the story about yourself and your "invention".

Atomizer's picture

Shhhhh. We first have to watch the breakdown of Honey Boo Boo mob first. After all the tricks are preformed, and no money is flowing in. Deem peepholes wellas bee tore up. /sarc

Miles Kendig's picture

The killer is the ratios.  We now have an approximation .. errr ... model of how the metals have no value crowd values metals as currency.  Looking at their initial offer at table one must wonder which of the ideas/concepts, trillion dollar coins or fed economists (and those that suck up to them for some flow of their own) understanding of markets is more tragically laughable.

Go Tribe's picture

In other words, the Fed cannot afford to let rates rise without one helluva real recovery.

nmewn's picture

This is why Benny will always be my bitch.

User 3461's picture

Peter Schiff said, the other night, that we all complain that our kids will be paying back our debts, but we're wrong - we will be repaying this debt by wild inflation. The point may seem obvious, but I think it's worth thinking about the implications of it being us and not our kids. If that were widely held, mightn't that light a fire under the ever-devouring lunatics? I danno.

fonzannoon's picture

Schiff in my opinion, underestimates some stuff. He has underestimated the fed's abilities with Zirp.

To your point, Schiff said several times that it won't be our kids that pay this back. The reason he gave was because the kids will leave. This country was founded by people escaping oppresive governments and looking for opportunities. He is right about that. But where are these kids going to go? It's the same shit in the rest of the developed world, and good luck heading to Russia or China.

laboratorymike's picture


USA is currently #10 for economic freedom in the world, and I think the Heritage Foundation is being a little generous. There are other parts of the world with a reasonable amount of freedom, or at least a chance at starting a new life. Just select the metrics that matter most to you for some suggestions.

fonzannoon's picture

is it any worse off in Japan right now for their economy or are they just having fun riding the stock market wave?

ekm's picture

They will seize the pension funds. I'm just adopting your idea.

Hungary did it 2 years ago. Spain is doing it now.

Everybodys All American's picture

If you bought the Nikei in Dec 1989 you're not very happy. Nikei was 38,916 in late 1989 and today 10,650. If we are going Japanese then this market is very overpriced and any enjoyment will be short lived.

and I do believe pensions will be forced to own Treasuries here as well.

fonzannoon's picture

No argument about the market, but it's an interesting disctinction. If you take our equity market down the way the Nikkei has fallen our economy would be in shambles. The wealth effect is all we have. How has Japan managed to hang in there after such a massive hit to their equity market? Is it because no one there has equities and only bonds?

ekm's picture

Easy answer: Exports

As long as the world accepts their exports, they will solve debt issues by seizing pensions since most of the debt is owned by japanese pension funds.

Once they get really old or the world is full of TVs and cars, they are screwed.

fonzannoon's picture

So taking exports into consideration....Japan's debt load is twice ours, but we may implode first?

Kyle Bass keeps hammering home the "optomism bias" that "Japan is self funding".

Schiff says the US goes first. Bass says Japan. Should be interesting to see, and by interesting I mean awful.

ekm's picture

If the debt is owned by your own people, the debt does not matter. The gov will seize the pensions.

The part of the debt that americans owe to the gov, is irrelevant. The gov will implement financial repression.

The problem is the part of the debt owed to China. China does not accept financial repression.


Kyle BAss is brilliant, but as everybody brilliant outhere, he's a top predator looking for preys. That's how he became famous with greek bonds swaps. Top predator.

fonzannoon's picture

For all we know they already did. We are all getting bernie madoff statements now.

ekm's picture

No the chinese haven't. Otherwise the US Navy would have started major shift to the south china sea.

Based on what I read, china has asked for payment with land, basically withdrawal of the US Navy from south china sea.


They still remember paying the debt to England after the opium wars with .......land. They called it Hong Kong. It was debt payment plus trade concessions.

fonzannoon's picture

if we hard defaulted on China, what would they do about it? wage war? 

ekm's picture

Correct but in an milder way.

They will simply invade Taiwan claiming it as payment, same as Russia did by invading russian speaking areas of the country of Georgia as payment for USA not paying 100% on fannie and freddie bonds.

Chinese general were openly asking US Navy to leave. I remember bloomberg interviewing an admiral of the navy at the time....BLOOMBERG????

After the russian attack, lo and behold, both china and russia were paid 100%.


fonzannoon's picture

very interesting. so they get taiwan and the US just looks away and things just keep rolling along with the US and the markets?

ekm's picture

If US let Taiwan go, China will have free hand and nobody will ever fear USA.


Hence, the meetings in Switzerland of central bankers.

IMO, they are trying to convince China and Russia to accept another crash. I think Russia has accepted under certain conditions, but China seems not to budge.

fonzannoon's picture

you are badass tonight ekm. 

ekm's picture

The very creation of USA in the current form was a debt payment by land.

Napoleon owed millions in gold to USA and he had wars going on in Europe. He couldn't wage war into USA unlike england to china, so he came up with the idea to sell the land to USA, thus paying off the debt plus some gold to finance his euro wars.

Hence, Louisiana Purchase. Simply payment by land.



ekm's picture

The core idea is that it was a debt paid with land.

You just proved what I said.

Freddie's picture

Taiwan will go. China and Taiwan will work out a deal.  Taiwan will not be happy but they will argue they are the same people.  I hope China gets Hawaii.   They backed the muslim and Hawaii covered for him.  China will want a lot more.  If it all falls apart they may go for the West Coast.  Russia will grab Alaska.

rufusbird's picture

Then Sarah will really be able to see Russia from her back porch!

cranky-old-geezer's picture



Sounds similar to state govts selling public buildings, parks, toll roads, etc, just on a much larger scale.  

Alaska might go to Russia technically, easier to sell that idea to the American sheeple, Russia had it originally, but it would really be going to China who holds far more US debt than Russia.  North slope oil and other resources would certainly go to China.  

If China and Russia agreed to forgive all the US debt they hold, they would be getting Alaska for about $2 billion per acre.  Sounds a little high to me, so they might want Hawaii, Wake Island, and any ohter US controlled islands in that area too.  Hawaii would have no resource value to speak of, but immense value from a military standpoint, putting Russian / Chinese military bases (and missiles) within 2,000 miles of the west coast, along with giving them effective control of the Pacific ocean.

Yep, sounds like a sweet deal they might want.

MyBrothersKeeper's picture

He owns Greek swaps no doubt but got famous for using the same simple math for forecasting the subprime mortgage crisis.  He mad 590 M for his clients. He is more of a capitalist than a predator...everything he is doing is legal and risking the real assets of his clients and himself......unlike the banker/government schills who have a no rsk, 100% reward policy.

Freddie's picture

I like Kyle Bass.  He took the time to understand the game and he plays it well.  I think if I were him, I would probably say less and keep a lower profile.   He almost gloats about Japan's disaster. I realize the politcians and Yakuza did it to Japan but that poor country is toast but so are we.

ekm's picture

Doing swaps is NOT investing. It's a zero sum game.

Kyle Bass was just smarter and luckier.

I agree with most of what he says, but I alwasys try to separate the real stuff form the bait.

secret_sam's picture

He wasn't that "lucky."  He just bought a hedge because it was so tremendously mispriced, and because it was his JOB.

cranky-old-geezer's picture



Doing swaps is NOT investing.

No, but it's gambling, and that's what everybody on Wall Street does these days.

KB doesn't get bailed out by the Fed if he loses.  Wall Street does.

MsCreant's picture

On a long enough timeline the ability to kick the can down the road drops to zero. The thing is they keep baffling us with bullshit and getting away with it. The corruption for most is burried/hidden by the narrative about America they hand us at birth and in school. God they want us to believe soooo bad. It is what keeps us under wraps, better than welfare, better than video games, dope, or porn. They will keep it up until folks can't eat, drive, or power their houses. They will keep cranking out spin after spin, story after story, engage program after program, until no amount of bullshit in the world will get everyone fed. Only then is it "on." 

Mr Lennon Hendrix's picture

Fights will go on as long as they have to.

buzzsaw99's picture

I'm still bitter about the santa and easter bunny thing.

The Miser's picture

Santa and the Easter Bunny have combined their efforts and are now called the US Government.   The Tooth Fairy is soon to join the conspirosy.   The Tooth Fairy now wants your guns.  The hell with teeth. 

Hulk's picture

WhaWHats up with Santa and the Easter Bunny? Don't tell me they are fraudulent too !!!

Joe moneybags's picture

I'm still laughing at poster Yobob's post over at the Wallstreetexaminer site, where he said something like:

" I've been waiting over two months now for my 2013 Mayan Calendar.  What gives?"

trav777's picture

they've already got you believing things that are laughably false and you react to those who speak truth exactly the way they want you to

Miles Kendig's picture

If the can kickers were frogs they wouldn't be squirming so much trying to put the fun back into dysfunctional.

The power to the pumps is shorting out and I would suggest that it is not only on, but many of this crops attributes are already baked in.  Some of them seem to relate to flooding and wild rice.


The best of New Years to you!

MsCreant's picture

Really glad to see you posting out there. Saw a movie with some seals in it the other night jumping out of planes. Thought of you and wondered how you were doing...I know you were not Navy but still...The movie was an in house service thing, it was stunning. They can get boots on the ground anywhere in hours. That is what they don't want to give up.

Miles Kendig's picture

Great to catch you too.

Sun Tzu called it desperate or deadly ground for a reason. 


When I was doing my airborne/ranger gig the standard was wheels up (with anywhere from 500-5000 personnel and equipment) to anywhere in the world via mid air refueling within 18 hours of getting the call.  The Army term for these kinds of operations is forced insertion. 


And you're right, the whole thing from planning through execution is bell ringin' stunnin', even when things don't go quite right.....(1:22:25-1:23:40)


Every day I have hot/cold running water, hot food et al is a fantabulous day.  See ya around gun slinger

MsCreant's picture

My husband watches Black Hawk down a couple times a year. We saw it over the Christmas break! LOL!

Miles Kendig's picture

HAH!  Classic

Perhaps we'll manage to catch up again somewhere.


Disenchanted's picture



The Army term for these kinds of operations is forced insertion.


So it's a rape...

Miles Kendig's picture

Catch that all on your own did you?

Newbie, have you ever heard of the CondomNation, or are you so new it passed before your arrival and interjection?

Please get a clue before you lower the collective IQ by jumping into such a conversation again.  No wonder I had elected to stop posting here and only come round for rare catch up conversation.

Al Huxley's picture

This is why I call bullshit every time the Fed spouts off about the possibility of ending QE.