The Real Interest Rate Risk: Annual US Debt Creation Now Amounts To 25% Of GDP Compared To 8.7% Pre-Crisis

Tyler Durden's picture

By now most are aware of the various metrics exposing the unsustainability of US debt (which at 103% of GDP, it is well above the Reinhart-Rogoff "viability" threshold of 80%; and where a return to just 5% in blended interest means total debt/GDP would double in under a decade all else equal simply thanks to the "magic" of compounding), although there is one that captures perhaps best of all the sad predicament the US self-funding state (where debt is used to fund nearly half of total US spending) finds itself in. It comes from Zhang Monan, researcher at the China Macroeconomic Research Platform: "The US government is now trying to repay old debt by borrowing more; in 2010, average annual debt creation (including debt refinance) moved above $4 trillion, or almost one-quarter of GDP, compared to the pre-crisis average of 8.7% of GDP."

This is a key statistic most forget when they discuss the stock and flow of US debt: because whereas the total US deficit, and thus net debt issuance, is about $1 trillion per year, one has to factor that there is between $3 and $4 trillion in maturities each year, which have to be offset by a matched amount of gross issuance just to keep the stock of debt flat (pre deficit funding). The assumption is that demand for this gross issuance will always exist as old maturities are rolled into new debt, however, this assumption is contingent on one very key variable: interest rates not rising.

It is the question of what happens to this ~$4 trillion in annual debt creation by the US, as well as other key ones, that Monan attempts to answer in the following paper on what happens to the world if and when the moment when rates truly start rising, instead of just undergo another theatrical 2-4 week push higher only to plunge over fears the Fed may soon pull the punchbowl.

By Zhang Monan, published first in Project Syndicate

The Real Interest-Rate Risk

Since 2007, the financial crisis has pushed the world into an era of low, if not near-zero, interest rates and quantitative easing, as most developed countries seek to reduce debt pressure and perpetuate fragile payment cycles. But, despite talk of easy money as the “new normal,” there is a strong risk that real (inflation-adjusted) interest rates will rise in the next decade.

Total capital assets of central banks worldwide amount to $18 trillion, or 19% of global GDP – twice the level of ten years ago. This gives them plenty of ammunition to guide market interest rates lower as they combat the weakest recovery since the Great Depression. In the United States, the Federal Reserve has lowered its benchmark interest rate ten times since August 2007, from 5.25% to a zone between zero and 0.25%, and has reduced the discount rate 12 times (by a total of 550 basis points since June 2006), to 0.75%. The European Central Bank has lowered its main refinancing rate eight times, by a total of 325 basis points, to 0.75%. The Bank of Japan has twice lowered its interest rate, which now stands at 0.1%. And the Bank of England has cut its benchmark rate nine times, by 525 points, to an all-time low of 0.5%.

But this vigorous attempt to reduce interest rates is distorting capital allocation. The US, with the world’s largest deficits and debt, is the biggest beneficiary of cheap financing. With the persistence of Europe’s sovereign-debt crisis, safe-haven effects have driven the yield of ten-year US Treasury bonds to their lowest level in 60 years, while the ten-year swap spread – the gap between a fixed-rate and a floating-rate payment stream – is negative, implying a real loss for investors.

The US government is now trying to repay old debt by borrowing more; in 2010, average annual debt creation (including debt refinance) moved above $4 trillion, or almost one-quarter of GDP, compared to the pre-crisis average of 8.7% of GDP. As this figure continues to rise, investors will demand a higher risk premium, causing debt-service costs to rise. And, once the US economy shows signs of recovery and the Fed’s targets of 6.5% unemployment and 2.5% annual inflation are reached, the authorities will abandon quantitative easing and force real interest rates higher.

Japan, too, is now facing emerging interest-rate risks, as the proportion of public debt held by foreigners reaches a new high. While the yield on Japan’s ten-year bond has dropped to an all-time low in the last nine years, the biggest risk, as in the US, is a large increase in borrowing costs as investors demand higher risk premia.

Once Japan’s sovereign-debt market becomes unstable, refinancing difficulties will hit domestic financial institutions, which hold a massive volume of public debt on their balance sheets. The result will be chain reactions similar to those seen in Europe’s sovereign-debt crisis, with a vicious circle of sovereign and bank debt leading to credit-rating downgrades and a sharp increase in bond yields. Japan’s own debt crisis will then erupt with full force.

Viewed from creditors’ perspective, the age of cheap finance for the indebted countries is over. To some extent, the over-accumulation of US debt reflects the global perception of zero risk. As a result, the external-surplus countries (including China) essentially contribute to the suppression of long-term US interest rates, with the average US Treasury bond yield dropping 40% between 2000 and 2008. Thus, the more US debt that these countries buy, the more money they lose.

That is especially true of China, the world’s second-largest creditor country (and America’s largest creditor). But this arrangement is quickly becoming unsustainable. China’s far-reaching shift to a new growth model implies major structural and macroeconomic changes in the medium and long term. The renminbi’s unilateral revaluation will end, accompanied by the gradual easing of external liquidity pressure. With risk assets’ long-term valuation falling and pressure to prick price bubbles rising, China’s capital reserves will be insufficient to refinance the developed countries’ debts cheaply.

China is not alone. As a recent report by the international consultancy McKinsey & Company argues, the next decade will witness rising interest rates worldwide amid global economic rebalancing. For the time being, the developed economies remain weak, with central banks attempting to stimulate anemic demand. But the tendency in recent decades – and especially since 2007 – to suppress interest rates will be reversed within the next few years, owing mainly to rising investment from the developing countries.

Moreover, China’s aging population, and its strategy of boosting domestic consumption, will negatively affect global savings. The world may enter a new era in which investment demand exceeds desired savings – which means that real interest rates must rise.

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falak pema's picture

can't stop this train; blowing out the debt is the chosen solution; eventually war. 

flacon's picture

Debt... the ability to create something from nothing. We are all gods now. /s

Skateboarder's picture

Debt doesn't exist in nature. We are meant to transact only with things that actually exist. Hence all the problems.

When the fuck will people realize that the only system that will work is one without debt at all...

If there's one thing you can be sure of, it's that you will never ever ever ever live in a debt-free world.

The Gooch's picture

The I.R.S. is the lackey of THE FED.

Income tax is VOLUNTARY and illegal according to the failure of states to ratify the 16th amendment.

Lackey judges don't allow it in court, but NOBODY can provide evidence confirming it's legality.

1040 up your ass NSA. 

Share this far and wide.!

feet or knees, bitchez?

edit: credit to Michael Krieger at Liberty Blitzkrieg for sharing it with me.

Tyler's, guest post LB's link FRONT AND CENTER, Please?!

flacon's picture

The problem with modern Keynesian economics: "Can an irrisistable force (infinite money printing) displace an immovable object (finite resources)?"


In THEORY, if all that existed was mathematics we could live for ever on the notion of INFINITY MONEY, but in reality two things happen:


1. The world runs out of resources, and/or

2. The people that lose confidence are removed from this world until nobody exists except the money printers themselves


It is precisely at that moment that he oceans will turn to lemonade and the surviving men (bankers) will become gods for having created the universe's ultimate perpetual motion machine. Krugman and Soros hope they live long enough to see the final fruits of their labour; peace, prosperity, and love for all mankind (those who survived) based on this perpetual motion machine that works in theory. 

TwoShortPlanks's picture

While everyone is enjoying their latest distraction, I thought I’d share some thoughts on the real  importance Gold and the Bigger Picture.

A picture paints a thousand words. Note the graphs:

So what does all this Gold buying mean?....What is really happening?….What is the Big Picture?

Firstly, it pays to be aware that Gold buying is simply a reaction to symptoms of an underlying financial illness, nothing more. We already know the underlying financial illness, but what is the root cause and why isn’t it being addressed?

This is where you must put on a hat very similar that of an Aircraft Crash Investigator where, ALL variables must be explored and ALL influences must be included (engineering, psychological, political, administrative…everything) so that the true nature is revealed. Failing to do so will ultimately result in the inability to define the root cause and factors which triggered and sustain the illness.

There are two takes on the enquiry into “cause”. The first is quite superficial, relatively obvious, is restricted to only the politico-financial picture in front of us, and you need only look at the financial data to see that it exists. However, this is still not the root cause, it is merely another layer of symptoms, to which we must delve deeper if we are to get to the bottom. The second is quite sinister; it includes all aspects of the first, but also other, hidden factors, which can easily be sourced by the general public (A good starting point would be John Holdren’s White Paper [Ecoscience, 1977] for the US State Department).

They are;

1.         CAUSE 1: That the Western World is plagued with massive debt obligations in the Public Sector, Private Sector, Shadow Banking System and the Derivative Markets. That the gap between Base Money and that of bank Assets/Liabilities is causing a ‘Gumming-Up’ (stickiness) of the financial system which in turn is causing a negative outlook in investors and tightening of credit markets (a wilful tightening of the purse strings with the added knock-on effect of a lowering of the money velocity to WWII rationing lows). Basically the West has loaned as much money as we can bare, it knows it, and has placed its’ wagons in a circle in the hope of riding-out the Indian attack. Countries are Monetising Debt to keep their heads above water and to devalue their currency so as to make their own exports more competitive until the Global Economic Engine recovers; this is a destructive and temporary measure which fails to address and rectify the cause….perhaps “temporary” is all that is needed?!

2.         CAUSE 2: In addition to #1, and as merely another layer of symptoms. A deliberate and orchestrated transfer of economic and financial wealth from the Western World economies to the Eastern World economies (More accurately from the 1st World to the 2nd, 3rd & 4th World), by way of loosening Central Bank monetary policy, Bubble dynamics and Governmental policy (creating a series of economic Bubbles), so that wealth is more evenly distributed across the West and East through a series of boom-bust cycles, Free Trade agreements, and the exportation of labour & manufacturing. This deliberate and controlled financial and economic transition is in-line with the deliberate and controlled transition of both Foreign Policy (War and Trade) and Domestic Policy (Security and Control), as Western World Democracy becomes more Socialist in nature and that Eastern World Socialism becomes more Democratic in nature. This is an homogenising of the Standard Of Living across the 1st, 2nd, 3rd, and 4th World nations. This is the Bushs’ New World Order being implemented.

Yin & Yang: It is widely known, researched, and documented that Communism was doomed right from the start. The only reason that Communism survived for so long was the ability for the Democratic West to support it through the inflation of a ‘Cold War’ Bubble where, endless sums of money were fed into the Military Industrial Complex, and Intelligence Agencies, on both sides, and filled from both ends. And endless series of Wars and Conflicts (more than 50 just for the US since WWI) saw that money flowed into the dual system. Money wasted in such a dynamic come directly and indirectly from the standard of living of both sides through Government spending and eventual Inflation -- you didn’t think that the price of everything going up is a natural event, did you? Inflation is actually a hidden tax.

Since the collapse of the former Soviet Union, that Yin/Yang dynamic has been temporarily interrupted. The [Western] Powers have filled the gap between the old paradigm and the new/next paradigm with Iraq, Afghanistan, Libya, Syria, and Egypt. These are all nations which had/have their own financial system and their own central banking system (a major no-no), as well as underlying natural resources such as Iraqi Oil, Afghani Lithium, Libyan Gold etc…well, not anymore!

Back to the ‘Root Cause’ of what is happening with Gold buying: Gold is being accumulated - and stolen in the case of the Central Bank leasing program – as a medium of exchange between the past paradigm, todays’ void, and tomorrows N.O.W. paradigm. At this stage of the wealth transfer (accumulation) it is undesirable for the price of Gold to rise drastically since it must still be paid for in some currency (ultimately US Dollars as ‘Spot Price’), that it is not wise to cause alarm or undue attention to both the rising cost of Gold and its’ antithesis, alerting the weakening of Fiat Currencies, and that the current financial system should not be unduly harmed through Golds’ competitive nature as a form of currency (‘the Smoking Gun’).

Nothing happens by accident: If you choose to look at the financial and economic picture by itself, then you will never be able to see the bigger picture and as such, predict the general flow of events, economic, political and social. The world will forever seem random and events, happenstance. This is of course what is hoped by many who are at the helm, driving the paradigm shift…driving the wealth transfer in their favour.

economics9698's picture

Competing currencies backed by gold/silver, 100% fractional reserve banking.  Problem solved.

DoChenRollingBearing's picture

Competing currencies are good enough.  The gold backing is not needed, nor even really desireable.  Gold, on its own, will do great in our world of conitinuing currency debauchement.

Alan Abelson, Barron's "Pet Bear", wrote about a note he received from Darren Pollock (Cheviot Value Management) who predicts $2400 gold by end-2013.

Review of Barron's -- Dated 14 January 2013

ATM's picture

Scott Minerd at Guggenheim made a similar claim. He stated he could see gold shooting to $2500 in  a short time.

CPL's picture

You would have to get control of the printer first.

The Gooch's picture

Unfortunately for them, that "perpetual motion machine" perpetuates their nose-dive into the beds of cesium-coated sand and plankton, sans oxygen.

The plutocracy's progeny sleep with the Bluefin. 

Well played, energy barons.

That 3rd eye on you distant progeny isn't there for enlightenment.'s picture



Who is Philanderer Knox?


He's a backdoor man.

The Gooch's picture

Neg, please provide a counter.


Stuck on Zero's picture

Debt is alive and well in nature.  Debt is owing something to something else.  Each living organism owes its life to its ecosystem. 


trav777's picture

the ecosystem wouldn't exist without IS the ecosystem.  Dipshit

A Nanny Moose's picture

One could apply Bastiat's Seen vs. Unseen to your comments. It is impossible to consume that which does not exist. You conflate rent seeking, mouth breathing, currency debasing, moral hazard addicted, consumer culture of humans with symbiotic relationships in nature.

In nature the payback comes from processes which MUST occur. Birds must eat, nest, reproduce, and shit. So....bird builds nest in tree, eats seeds from tree, then shits out nutrients and and processed seeds required to create future trees. Bird has family, and needs to feed that family by eating pests which might harm tree and other flora.

Sometimes in nature we see over-accumulation of resources, but that accumulation is used to survive lean months (i.e. winter). If an excess of resources if not produced, the squirrel, bear, and birds, do not survive lean months. You cannot borrow the nuts which aren't produced.

Takeaway, nature requires savings, not debt

Skateboarder's picture

Thank you Moose, that is more or less the sentiment I wanted to get across. We live in a world of physical resources, and they are abundant if we want them to be. Saving lets us accumulate resources and use them appropriately for building something bigger/better/more evolved than what we currently have. If we operate with debt, it has to be a zero-sum game with respect to physical resources. With a money system that is not backed by anything physical, it is not a zero-sum game, and therein lies the problem.

TWSceptic's picture

This is a very naive worldview. Large private sector investments often require debt. Even in free markets there would be debt. Debt itself is not a problem, it's actually a solution to a problem, and a rather important mechanism within capitalism. The real problem lies with institutions having the ability to create an unlimited amount of new currency and at the same time artificially low interest rates.

tango's picture

You are exactly right. Much of this anti - debt talk derives from anti-bank and anti-interest talk. This leads to comments supporting despotic regimes on the mistaken notion that interest is not charged in Islam. (Utterly wrong.) Any society beyond hunter gatherer stage incurs debt, particularly capital projects like sewers, roads, stadiums and schools.

Skateboarder's picture

Apologies for the naive-like comment, but I understand the purpose of debt and how it can be used responsibly. Perhaps I should have said 'no debt without a physical standard of monetary backing,' as that would allow a system in which debt is allowed but limited by the amount of physical backing available.

I am still not comfortable with any debt existing.

Snakeeyes's picture

Now you know why Bernanke is panic stricken. This is a train wreck waiting to happen!

Cap Matifou's picture

Carrol Quigley spoke about "tragedy and hope". He hoped that humanity will silently succumb to the world elite's global plans of domination, or else face retribution, wars, famine you name it, which would equal to tragedy.

FL_Conservative's picture

"And, once the US economy shows signs of recovery and the Fed’s targets of 6.5% unemployment and 2.5% annual inflation are reached, the authorities will abandon quantitative easing and force real interest rates higher."


Well, with Obama's team of economic incompetents on the job, no concerns about the economy improving enough for the Fed to go pulling away the punch bowl.

cranky-old-geezer's picture



Fed will never pull away the punch bowl.  Ever. 

It's QE from now on ...till the currency collapses anyway.

yogibear's picture

Exactly, the Fed is stuck and they know it. Their jawboning is still take seriously.

pauhana's picture

Tick, tock, tick, tock . . . . .

Chupacabra-322's picture

@ Falak pema,

“When all else loses, they take you to war.” -Gerald Celente


H E D G E H O G's picture

"The US government is now trying to repay old debt by borrowing more'  WTF! It's called the REVERSE PONZI !!!!

TheSilverJournal's picture

Seems like the intire world is forgetting to ask the most basic of questions:

  • What is an interest rate?
TheSilverJournal's picture

Obviously, you don't understand interest rates, creating value, efficiency, capitalism, postponing consumption now in order to invest and consume more later, capitalism, the profit motive, or free markets.

flacon's picture

Ok... so what's the difference between interest rates and dividend payments? What's the difference between a private individual or a private corporation charging interest vs. a government offering interest payments on a bond? What is the difference between private slavery vs. public slavery? What is the English meaning of the word BOND?


Forget all that... just tell me.... what is a LOAN and how can it be REPAID (in the context of Federal Reserve Notes (ie, not Gold))? 



TheSilverJournal's picture

The whole point of lending is to get paid for the risk of making the loan and the opportunity cost of foregoign altenative investments / consumption. Loans are repaid when their used productively. When used unproductively, the lender doesn't get paid back, which provides the incentive for the lender to make a good loan. Maximize those profits.

The crazy thing is that real rates are negative, which should basically never happen. Basically by definition, investing in a can of beans at the grocery store is better than investing in bonds with negative yields.


Raymond Reason's picture

The whole point of lending is to get paid for the risk

For 1500 years, the whole point of lending was charity.  The redefinition of usury opened the pandora's box we now live in.  I know, you want your money to work for you.  Well the spiritual truth is, we were designed to work, it is part of being a man, and saving for problem with that.  Interest on debt breeds war and evil.  I'm not advocating making it illegal, but rather reminding people it is a sin, and should be shunned, both as creditor and debtor.  Wars would be less frequent and smaller.



Russia isn't broke. 

TheSilverJournal's picture

Increasing productivity is the most humane thing there is. Your ideas of shunning lending and borrowing are inhumane and evil. The road to hell is paved with good intentions and your intentions may be of extreme benevolence, but the results are the exact opposite.

NoDebt's picture

That's an interesting comment.  A worthy one, I think, even if you take away the religious comment (which you are certainly free to use, in my opinion, but still a good observation one even without).  I down-arrowed you, but don't take offense, please.

Wind that all the way back and you get to the basic core of money.  Ever since there was money, there were interest rates, loans, etc.  Money is an invention of people.  It exists as a medium of exchange (as opposed to bartering) and as a store of value (as opposed to human-usable goods that have a shelf-life).  In short, it's a TECHNOLOGICAL INVENTION.  And old one, to be sure, but it's one of the all-time-best technological inventions ever devised.  I can not be "un-invented".

As such, it comes with consequences both good and bad.  Like all tools, it can be used well or used poorly.  For good or for evil.  Wars being smaller and less frequent without debt.... I don't see that.  People will find just as many reasons for war without it.  Like all tools, it's use depends of the skill and motivations of the person(s) using it.

Empires come and go, leaders come and go, ecomomic models come and go, human nature remains the same.

Raymond Reason's picture

No offence taken.  Don't worry, i don't evangelize, i'm Orthodox (Christian).   

Ever since there was money, there were interest rates, loans, etc.

I think you are mistaken, not in fact, but in practice.  Christianity has been the dominant world religion for 1700 some odd years, except maybe the Far East.  For the first 1500 years of Christiandom, charging interest on loans was a mortal sin, that is not to say there was no banking in the Western world, but it was greatly restricted (because of this).  Islam also forbade interest, although the've had work-around gimmicks. Money changers infiltrated the Western church in the 16th century and the once abominable crime of usury was overthrown by a process of osmosis.  Nevertheless, i believe the Church had it correctly from the beginning.  There are no doubt benefits to banking, but the abuses far outweigh the rewards.  WW2 was the greatest bloodbath in history, and i think if you look back, wars were more difficult to wage (due to finaces) in early Christian times. 

flacon's picture

What is the difference between loaning money to someone and demanding the return of capital plus interest payment VS. giving them the money with a receipt (stock) and earning a divident payment based on their productivity? 


There is a profound difference in dividend payments vs. interest payments. 

turicum's picture

I belong to the intire world, and did actually forget to ask this basic question. But I thought I knew it. Why should I have asked?

TheSilverJournal's picture

To understand how central planning is destroying the economy and how to profit from the break down of the centrally planned world fiat monetary system whcih will cause the largest and swiftest transfer of wealth ever.

Or you can invest all of your retirement in cash, bonds, real estate, the US service sector, depend on that social security and public pension, watch your life savings disappear, and become a hopeless sap like tens of millions.

ebworthen's picture

Banks are interested in lending at 3.75% to 29% when they get money from the FED back door at 0.05% and all their bad loans are handed off to Fannie/Freddie or securitized and bought by the FED.

Meanwhile, the people the FED purport to work for get 0.35% on their savings.

Everybodys All American's picture

Obama said we don't have a spending problem. Hand over the keys and raise the debt ceiling. What else would you expect from a lowlife community organizer?

Beam Me Up Scotty's picture

I know the debt ceiling is largely symbolic, because it gets raised all the time.  But if it disappears entirely, spending will go through the roof.  Liberals have infinite spending desires.  They are like someone who buys a lottery ticket---they dream of all the stuff they will buy if they just win the lottery.  They can never tell you how much spending is enough, because there is no level of spending that is enough.  If they get the keys to the debt ceiling, thats when inflation explodes IMO.  Think about all the money that will hit the street.  Right now its all bottled up in the banks to shore up their balance sheets.  If the feral gubmint gets to spend with no limits, watch out.

Anusocracy's picture

You are so right, liberals are the problem.

Every time conservatives are in power they reduce the size of government to what it was in 1910.


lakecity55's picture

Cloward-Piven. Destroy the US, hand it over to his department head at the KGB.

Return to Russia where there are many bath houses of steam.

The Kremlin then turns over the keys to the US to TPTB.

(for all we know, one of the holds over ozone are KGB photos of him with live boys).

Red Raspberry's picture

Russia is a tax haven you know...