America's Tragic Future In One Parabolic Chart

Tyler Durden's picture

When it comes to forecasting the long-term trajectory of the US economy, things usually get very fuzzy some time after 2020 because, as even the most hardened optimists, the "impartial" Congressional Budget Office have recently admitted, America has at best 3-4 years before everything falls apart due to the unsustainable demographic crunch that will wallop the US entitlement state as demographics suddenly becomes a four letter word. Beyond that, not even the CBO dares to plot a straight line as to what happens should America not get its fiscal house in order.

Which is why were were very surprised to see none other than Morgan Stanley's David Greenlaw and Deutsche Bank's David Hooper release a paper (whose views do "not necessarily reflect those of the institutions with which they are affiliated") titled "Crunch Time: Fiscal Crises and the Role of Monetary Policy" which is a must read for everyone interested in what very likely will happen to the US as ever more power is handed over by the country's now terminally malfunctioning fiscal and legislative apparatus to the monetary policy vehicle controlled by the US financial oligarchy.

Since we know that most readers are pressed for time, we will cut to the chase: the following chart shows what according to the authors' own simulation of the US economy, and not that of the CBO, rates on the 10 Year will look like through 2037. The second chart shows what US debt-to-GDP will be for the next two and a half decades.

The charts need no commentary. Parabola #1 showing the yield on the 10 Year under the authors' simulation:

And Parabola #2 showing total US debt/GDP:

For those who request at least a little commentary, here it is:

[W]e have assumed the U.S. current account deficit holds at 2.5% of GDP-- a level that matches the best result seen in the past decade and is slightly narrower than the 2.7% of GDP recorded in 2012. If, instead, we assume that the current account deficit reverted to the 3.7% of GDP average seen over the prior five years, then the projected debt burden would reach 180% of GDP in 2037.


We can also examine a scenario in which policy actions and economic outcomes produce a less favorable path for the primary budget deficit (using our baseline current account deficit assumption of 2.5% of GDP). For example, suppose that the looming budget sequester scheduled to occur on March 1 is cancelled and that the steady-state unemployment rate is assumed to be 6% (as opposed to the 5.25% as assumed by CBO). In this case (which we refer to as Simulation II), the budget deficit would be quite a bit higher than in the initial scenario. The debt/GDP ratio would rise much more rapidly, hitting 304% of GDP by 2037 (Figure 3.13) and bond yields would skyrocket, eventually getting above 25% (see Figure 3.14).


We should emphasize that we are not presenting these alternative simulations as more realistic forecasts of what the U.S. experience will actually be. In a country like the United States, the debt premium presumably would arise from inflation fears rather than concerns about outright default. And if we are talking about a higher inflation rate, forecasts of nominal GDP should be adjusted as well. Instead, we view these simulations as illustrating the extent to which the path implied by baseline CBO projections could quickly become much more difficult to manage than some policy-makers may be assuming-- something dramatic will need to change well before U.S. interest rates reach double-digit rates


Our main conclusion is that higher debt levels can have a significant impact on the interest rate path and that feedback effects of higher rates on the level of indebtedness can lead to a more dramatic deterioration in long-run debt sustainability in the United States than is captured in official baseline estimates. Figure

Putting some numbers to the forecast by Greenlaw and Hooper, and assuming a 1.5% CAGR for GDP, which in the new structurally slower normal is quite generous, we get $23 trillion in US GDP by 2037, $70 trillion in debt, and a blended cash interest expense that is over 75% of total GDP.

We also get the Fed monetizing all of it.

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marcusfenix's picture

I find it difficult to take any chart that plots decades down the road seriously, or to even be concerned with what that chart predicts because I know for myself and everybody I work with, we all head home on Friday wondering if we are still going to have jobs on Monday. because we know that's how it's going to happen, you show up and the doors are locked, no warning, just somebody there to let you in to grab your personal effects and that's it.

one of the things I love about ZH is the constant reminders, via data and chart updates and well thought out pieces and analysis where the tylers and there guest posters employ critical thinking, of the now, what is really happening today.

most of the time when I get into a discussion with one of the  many propaganda addled sheeple regarding the state of our economy they inevitably fall back to the argument that a collapse of the system will not happen because "it hasn't happened yet".

I beg to differ. it may not be occurring in free fall speed like the WTC on 9/11 but all one needs to do is shake of the normalcy bias and take a look around to realize that the collapse is under way, and our society, our culture is coming unglued even now. 

I can guarantee you if you took somebody from 20 yrs ago and dropped them into today, they probably wouldn't even recognize the country you dropped them into. we are the frog in the pot, and the water has turned from warm to boiling.

these charts show the end of the road decades from now, but is that not a hopeium induced delusion in and of itself? what road is the can being kicked down today? more likely the can is bouncing down the side of the cliff, catching the ledges as it tumbles, slowing the fall, but on it's way to the bottom none the less.      


GMadScientist's picture

I contend that 95% of us were in the world you shrink from now 20 years ago, and it's only the remaining 5% who are surprised at how things have gone since then as the blinders of the debt-based economy are peeled back to reveal the ugly underneath the rest of us have been dealing with all along.



TNTARG's picture

All this talking about guns and ammo.

I'm curious. You're planning to use it for...What?

1) Self defense? To defend yourselves from... What?

2) Siege the Fed?

3) Overthown your government?

4) Shoot them all?

5) Other?

Please, enlight me. Grazie tante.

robertocarlos's picture

I would bet that because I'm out of debt I will be one of the losers. I need 3 more years to build some sort of non-gun defence from all the zombies.

geotrader's picture

"we get $23 trillion in US GDP by 2037, $70 trillion in debt"


2037?  24 years from now when most of the geezers responsible for this will have been put to pasture.  It's not their problem.


PeterSchump's picture

The omnipotent, omniscient, benevolent deity, ObaGoreKrug, is most wise and knows that all will be saved if we spend more BernakBucks and eliminate fossil fuel consumption.