Guest Post: How Far To The Wall?

Tyler Durden's picture

Submitted by Terry Coxon of Casey Research

How Far to the Wall?

Decades of manipulation by the Federal Reserve (through its creation of paper money) and by Congress (through its taxing and spending) have pushed the US economy into a circumstance that can't be sustained but from which there is no graceful exit.

With few exceptions, all of the noble souls who chose a career in "public service" and who've advanced to be voting members of Congress are committed to chronic deficits, though they deny it. For political purposes, deficits work. The people whose wishes come true through the spending side of the deficit are happy and vote to reelect. The people on the borrowing side of the deficit aren't complaining, since they willingly buy the Treasury bonds and Treasury bills that fund the deficit. And taxpayers generally tolerate deficits as a lesser evil than a tax hike.

Deficits are politically convenient for a second reason. They can take a little of the sting out of a recession. That effect is transient, and it's not strong – more like weak tea than Red Bull. But it can be enough to help a struggling politician get past the next election.

Yes, sometimes there's a big turnover in the personnel, such as with the 2010 election, when a platoon of self-styled anti-deficit commandoes parachuted into Congress. As soon as they had taken their seats, they began offering proposals to deal with the government's trillion-dollar revenue shortfall. But none of the proposals were serious. They were merely tokens intended to make politicians wearing anti-deficit uniforms look less ridiculous. Cut a ginormous $2 billion out of this program and a great big $500 million out of that program. Reduce spending by half a trillion dollars... over ten years. Balance the budget to the penny, but later. No one proposed anything close to dealing with the deficit now.

So stay up as late as you like on election night to see who wins, but the deficits aren't going to stop anytime soon. The debt mountain will keep growing. The part of it the government acknowledges is now approaching $16 trillion, which is more than the country's gross domestic product for a year. Obviously, the debt can't keep growing faster than the economy forever, but the people in charge do seem determined to find out just how far they can push things.

Inflation as Savior

At some point, personal and institutional portfolios will be glutted with Treasury securities, and the government will be forced to pay higher and higher rates to induce investors to take more of the paper – and the accelerating interest cost will make the deficits that much bigger. When that happens, the problem will be feeding on itself. The only way for the politicians to buy time will be through price inflation, to reduce the real burden of the debt, and whether they admit it or not, inflation is what they will be praying for.

The Federal Reserve will hear their prayer. It is 100% committed to protecting the value of the dollar, except when it is debasing the dollar in an effort to cure a recession or prevent a depression. It's been doing that important work since 1971, when the dollar slipped the leash of the gold standard. With every downturn in the economy, the Fed speeds up the creation of new cash. Each time, the economy does seem to recover, but the economic distortions that caused the recession are allowed to linger to one degree or another. They accumulate like the grotesqueries in the picture of Dorian Gray and predispose the economy to further and deeper slowdowns.

For the last three years, the Fed has been performing an additional service to help keep the system going. Whether or not you believe that suppressing interest rates with newly conjured dollars stimulates the economy in a healthy way, the practice certainly makes it easier for the Treasury to sell bonds to cover its deficit. And as total debt grows, the Fed will be biased more and more toward printing in order to retard any rise in interest rates. In short, the cost of postponing the bankruptcy of a government engaged in nonstop deficit spending will be progressively higher rates of inflation. There is no inherent stopping point in the process short of hyperinflation and the destruction of the currency.

Will it actually go that far? My guess is that it won't, but that's a guess about politics, not about economics. At some point, perhaps at an inflation rate of 30% or 40%, the turmoil that comes with runaway inflation will become so painful that the public will accept, and the politicians will find it wise to deliver, a balanced budget and a return to a stable currency. But even a year or two of such high inflation rates, while not a Weimar experience, would be a calamity. Most people's savings would be destroyed. Most businesses would be badly damaged, and most investment portfolios would be ruined. It would be like the economy hitting a wall.

But when will the economy reach the wall toward which it is headed? Not soon, I believe, but in the meantime there will be plenty of excitement.

The twin motors driving the economy toward the wall are deficits and money printing. Let's take them in turn and try to foresee their pace.

Danger Zone

When federal debt recently overtook a year's worth of gross domestic product, the US government crossed over into the zone at which, by historical experience, governments can get caught in a debt trap. High debt raises doubt about creditworthiness; doubt raises borrowing costs; higher borrowing costs add to deficits and day by day to the total debt burden; growing debt increases doubt about credit worthiness. Once in the cycle, it is hard to escape.

But Debt = GDP is not a formula for certain doom. It's possible to spend some time in a bad neighborhood without getting shot. Japan's ratio of government debt to GDP, to cite an extreme example, is over 230%. Perhaps the Japanese government is living on borrowed time as well as on borrowed money, but it is still able to find buyers for its debt at low yields.

The US may outdo Japan's ratio before hitting the wall. The capital markets will tolerate an especially high debt-to-GDP ratio for the US for a simple reason – it's safer than most other places. It doesn't get invaded, it doesn't get blown up in wars, it doesn't have revolutions and it hasn't destroyed its currency recently. Still, there is a limit to what the capital markets will tolerate.

How rapidly the US ratio of debt to GDP will grow depends on a list of barely-guessables, including how long the recovery from the recent recession drags on, the time elapsed until the next recession and the level of the public's actual tolerance for deficits. Assuming that the recent level of deficits continues indefinitely, it would take on the order of ten years for the US debt-to-GDP ratio to get where Japan's is now, which would bring us near 2022. After that, the safety factor still should buy the government a few years more.

That adds up to a long time to wait for the end of the world. Fortunately for the impatient, there is the Federal Reserve, and what the Fed will be doing, what the effects will be and when they will be felt all can be anticipated with a bit more clarity than the doings of Congress, although it remains guesswork.

Approaching the Wall

The M1 money supply has grown by 52% since the Federal Reserve opened the spigot in October of 2008. That alone is reason to believe that the current recovery, though painfully slow, is real. It has been held to a snail's pace by the fear of deflation that so many people learned in 2009. Fear of deflation is a reason to hold on to cash, but as 2009 becomes more distant, that fear is waning, and the holders of that 52% are becoming more and more disposed to think of it as excess cash that should be spent on something. That feeds the recovery.

Given the slow pace, it should be perhaps two years until the economy seems more or less normal, but the excess cash will still be at work. Give it one more year, and price inflation will emerge as a noticeable complaint. Then the Federal Reserve will let interest rates rise, but only slowly at first. By the time it tightens in earnest, price inflation will be approaching double-digit rates. It will look like the 1970s. And despite all the statistics it publishes, the Fed will only be feeling its way in the dark, since there is no reliable, real-time indicator of how much excess cash there is in the system. So inflation will keep rising, and the Fed will keep tightening until it produces a rerun of 2008-2009, with crashing investment markets announcing a new recession.

But there will be two important differences vis-à-vis 2008-2009. First, it will be happening with the US government far deeper in debt than it was when the last recession began. In the tightening phase, the government's interest expense will move above $1 trillion per year, and the budget deficit will jump to new record highs. Second, it will be happening with the rate of price inflation already at a troubling level. Another round of the monetary therapy the Fed applied to cure the last recession would push price inflation to levels beyond those reached in the 1970s. They'll do it anyway.

This gets us to 2016 or 2017 with the system in turmoil but still functioning. No wall yet, and there will be room for at least one more cycle of reflation. But it will be a fast cycle, since in an environment of already high inflation, people will be quick to spend the newly created cash. That means a quick recovery from the 2017 recession and a catapult into the 20% plus range for price inflation. Then the wall may be in sight.

In the Meantime

Did you hear about the 60-meter-wide rock? Asteroid 2012 DA14, with the kinetic energy of a thermonuclear bomb, is headed toward us. In February of next year, its approach path, as recently estimated, will bring it to within 17,000 miles of the Earth. What I haven't seen mentioned in any of the reports is that the closer an orbiting body is expected to get to the Earth, the less precise and reliable the estimates of its path become. Its path may veer this way or veer that way. And in astronomical terms, 17,000 miles is very, very close – closer than most man-made satellites. So it's not just the economy we need to anticipate.

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The Alarmist's picture

My money is on the Asteroid.

ACP's picture

Doesn't Tepper already have his balls to the wall?

johnu1978's picture

Now I can see why people drink!


Primitive Skills Classes - Edible Plant Tours


Transformer's picture

Left out of this article, and its possible time line, is the repudiation of the dollar as the world's currency.   It's happening now and creates a whole different time line.

Manthong's picture

In regards to government projections, my tendency is to wait for the revisions.

skepticCarl's picture

This article was excruciatingly lame until the asteroid thingy.

LowProfile's picture



AUD's picture

And why can't they see that you go bankrupt slowly, then all of a sudden?

chubbar's picture

"At some point, personal and institutional portfolios will be glutted with Treasury securities, and the government will be forced to pay higher and higher rates to induce investors to take more of the paper – and the accelerating interest cost will make the deficits that much bigger. When that happens, the problem will be feeding on itself. The only way for the politicians to buy time will be through price inflation, to reduce the real burden of the debt, and whether they admit it or not, inflation is what they will be praying for."

Can someone unpack this a bit for me and explain how "price inflation" translates into a reduction of the "real burden of debt"? Is he saying that price inflation will translate into wage inflation? With a weak dollar, imports become more expensive (price inflation) but that money goes overseas, not into increased wages. That transmission has become drastically reduced over the past decades of offshoring production. Can anyone convince me otherwise? I'm wide open to other explanations.

smb12321's picture

OK, supposedly price inflation allows one to pay off existing debt with cheaper dollars.  Salaries may rise 50% but old debt remains the same.  Voila!  That is why folks in societies with rampant inflation take on debt - it can be paid in cheap currency.

What Tyler (not sure which one) is saying on the other end is that the FED has trapped itself into permanent low interest rates since raising them would exploded the deficit.  And yet at some point they must, thus the quandry.

LowProfile's picture


Can someone unpack this a bit for me and explain how "price inflation" translates into a reduction of the "real burden of debt"?

It's unpackable because it's phundementaly phucked.


For starters, he makes a fatal error in thinking that "investors" are buying Treasury debt.

Investors are buying less.  The Fed is taking up the slack, and then some.  They are monetizing the debt.  This will ultimately be very inflationary (as in super-hyper).


He makes another error in thinking that PRICE inflation will somehow ease the burden of debt.

This is a monumental error.  WAGE inflation would do that, but not price inflation.  Price inflation without wage inflation will lead to less cash available to pay down debt, and would result in deflation.


This guy is seriously confused.  I'm surprised this came out of Casey Research, they've always seemed pretty astute.

NotApplicable's picture

That was the instant I quit reading. Anybody who doesn't understand ZIRP has little else of value to offer on the subject.

We'll be well beyond WWIII before there's anything remotely close to the idea of meaningful sovereign debt service costs.

ShankyS's picture

I could not take the article. Anyone that does anaysis that is solely US based and does not include global systemic risk is missing 50% + of the equation. Then you mentioned the Ateroid thingy and I had to go back and check that out. 

AbelCatalyst's picture

Comparing the US and Japan makes no sense. Most of Japan's debt is held by their own citizens who had a high savings rate until recently. As they begin to float this debt on the international stage they will quickly hit the wall. There is no way the US could come close to the Japanese can kicking! Plus, the real US debt is far higher if you add in the unfunded liabilities.

This article is not making a legitimate comparison and if I had to guess the US hit the wall before the asteroid hits us. By the time the asteroid arrives things will be so screwed up people will not even care about the f'ing incoming rock!!!

Goolie's picture

Japan realized they can't go to the international stage to sell their debt.  They can't afford to service higher interest rates.  So they simply will do what the Fed and Europeans do, print Yen in their case, and buy their own JGB's.  And while all of the world's central banks do the same, there will be no rising interest rates.  Just competitve devaluations.  I only see this ending when folks finally realize that it's all a ponzi scheme and no longer accept the currency.  Of course the Kleptocrats will have one more lever to pull.  They'll impose capital controls and unleash their military and police forces to quell civil unrest and try to protect the reserve currency.  In the end the currency will have buyiing power one day, and the next, not.  The only way I see to protect oneself is to have a stock pile of gold, silver & lead.  And a pad somewhere outside your devolving country to land when it all hits the fan.

Cabreado's picture

"This article was excruciatingly lame until the asteroid thingy."

I beg to differ.

It was morose.

Appropriately so.

If you're looking for excitement, it's on its way, at which point you may find yourself preferring this so-called lameness.
Or, maybe the asteroid thingy.


Creepy Lurker's picture

I'm hoping the asteroid thingy hits DC. Poetic justice.

WoodMizer's picture

Not unless its made of gold and silver.

centerline's picture

Carlin was a genius.  He saw the writting on the wall so early.  Funny that most people still think it is just comedy.  I saw him once on TV in his later years doing a presentation sometime back in the early 2000's on CSPAN or something.  It was actually a more seriouos platform.  He was outstanding.  And no one really had any idea then how accurate and insightful he was.  Actually, let me retract that... I think that many didn't get it, and a bunch more just didn't want to admit it.

RIP Carlin.

Thanks for clip.

CvlDobd's picture

He saw the writing on the wall well before most people. As usual.



Yes_Questions's picture



and he went out swinging, unlike (so far) the sell out Dennis Miller.



Joseph Jones's picture

The "wisdom" of Dennis "The Hack" Miller:

  1. Kill all the Muslims now and often. 
  2. Vote Republican and all will be right in the world.
  3. What's good for Israel is great for the USA. 
  4. Let the Generals run the world.

Scum bag of the month award winner.  



I loved the late George Carlin with Doris Day and the late Brian Keith in "With Six You Get Egg Roll".  Vick Tayback made a short appearance too.  RIP dear George and Brian...




xela2200's picture

I saw him as an aluminum foil hat wearing lunatic, until I grew up. Now, I am not laughing. As a matter of fact, I am not laughing at a lot of people that I thought crazy for speaking up (Eisenhower, Schiff, Black, even those back wood paranoid founding fathers).

CvlDobd's picture

Yeah I've found that to be the typical response. Most people laugh but deep down they hate George. Once they start to understand what is going on they like his work more and more.

The Alarmist's picture

60m will be on the order of a "meteor crator" of Arizona event ... life will be inconvenient for most of us, but we'll get along just fine.

akak's picture

If it should happen to land on a certain district on the Potomac River, we'll all get along much finer.

Change-In-Trend's picture

Moving gradually down into 23-26 April low.

American34's picture

Mr. Durden. It would be nice if you had a place where we could post questions to you and you could reply if you like. I understand that thousands of questions would likely be posted but it would still be nice to read your answere to the few you decided to reply to.

Everybodys All American's picture

That wall is coming at an exponential rate of speed. Trust me.

CURWAR2012's picture

Parabolic is the term, parabolic my friend.

StychoKiller's picture

F(x) = x2  is NOT the same as G(x) = ex

The Disappointed's picture

Kinda reminds me of one of Zeno's paradoxes, the the that proves that the arrow in flight never hits the wall bacause it must first go half of the distance, but it never takes into account that the arrow must doulbe its speed each time.

Buy silver while you still can afford it, gentlefolk (I was raised better than to use the word 'B****es'.

The Other Dave in SF (where all of thed swans are pink and we're f***ing proud of it!)

P.S. Everyone knows Ayn Rand was a dyke, don't they? Married, but no kids, she just was tired of getting ripped-off (like me).

TooBearish's picture

the most interesting part of this post was the space rock thingy- the other shite like  the government will be forced to pay higher and higher rates to induce investors to take more of the paper ...caused me to laugh out loud - why on earth does anyone think the FED will ever allow that to happen?  There aren't any markets dood, and the "market" doesnt set interest rates...Benny does !

BTW - the FED will able to take care of the space rock too - just expand the balance sheet another trillion...

StockHut's picture

I definitely think we have at least 1 or 2 reflationary cycles before the game runs out.  It's a shame this shit has to get dragged out.  Hopefully more people become aware and revolt against the government

The Navigator's picture

If we get 1 or 2 reflationary cycles, BTFD - I'd love to see silver go below $25 or $20, even though I bought SOME at $35 (most at $10, $12, & $15) - at $25 or $20 I could rebalance the purchases at higher levels AND and more stacks.

Either way, I monthly-cost-average and buy some every month.

ebworthen's picture

Dunno, seems like the wall might be approaching faster than that, more like the asteroid.

skepticCarl's picture

The inflationary spiral, and the devaluation of the dollar, is a process, not an event, like hitting a wall.  It has been ongoing, thoughout the lives of everone alive today.  Don't sweat it, just prepare for it by owning your own home, some precious metals, some large cap international stocks, and maintaining family ties and personal friendships.

SayTabserb's picture

Good analysis, I think. One reason Japan may not be a good comparison for debt tolerance: Japan has survived with its very large deficits/total debt because until recent years it was a powerhouse exporter. This is how the United States got out of the very large natl debt (larger as a % than it is now) following World War II - a big export market to the destroyed rest of the world. The U.S. does not have that leeway now. So where does the U.S. get the wherewithal to convince investors they will be paid back with other than hyper-inflated printed dollars? I think the wall is much closer than 12 or 15 years out. I think the "cliff" that Bowles-Simpson was talking about (2015) is closer to the mark.

seek's picture

I had been predicting a 2018 wall, much like Casey appears to be, but in the intervening months I think that's too far away. Some of the above posters are right -- we're on an exponential path, and it's making the call a lot harder since it's coming faster and faster.

Plus this is still based on an exponential but linear progression. The thing is, right before the boom this system will go non-linear and be very unpredictable, and I keep seeing hints (Europe, in particular) of that non-linear instability appearing. The key will be when the rate of change is faster than the PPT/TPTB/Fed can adapt to manipulating it, and I think one can argue that the darkest day of 2008 with the massive fund outflows crossed that threshold for a few hours.

When this one hits, a little change in FDIC rules isn't going to fix it like last time did. They'll have to shut the system down, and once that happens, restart will be difficult -- they might as well attempt whatever change they're going to try during that shutdown.

Errol's picture

Seek, I agree that the article makes an unwarranted assumption that things will continue in a linear trajectory.  I can think of a couple of things right off the top of my head that could make things non-linear in a hurry:

A derivatives panic.  The speed of data processing & communications makes it possible that the firetrucks could be late in bailing out counterparties, leading to cascading defaults that might require a "holiday" to sort out.

The fact that the EROEI of oil, nat gas, and coal are declining makes genuine growth a thing of the past.  Increasing the leverage on an ungrowing stock of productive assets makes the system less stable with every QE and LTRO.

XitSam's picture

"At some point, perhaps at an inflation rate of 30% or 40%, the turmoil that comes with runaway inflation will become so painful that the public will accept, and the politicians will find it wise to deliver, a balanced budget and a return to a stable currency."

The public will insist that the politicians do something. In response the politicians will do everything except balance the budget or return to a stable currency. The ability of politicans to avoid doing the right thing is infinite.

Gringo Viejo's picture

Off Topic: I want to thank Tyler and ZH. I'm a radically conservative old man and I've been censored by most websites, even banned from posting at breitbart (I'm at a loss as to why). ZH has allowed me to speak MY truth as I see it and I'm most grateful. Unlike many of the younger readers, I remember a free America...where you could get into a bar fight and the cop would either of you want to press charges?....No. Then get out of here and don't let me see either of you assholes again. Now I live in a Nation where EVERYONE is a "criminal in waiting."

Thank you Tyler and thank ALL of you that keep speaking YOUR truth as YOU see it.

centerline's picture

You sound like a lot of fun.  Feel free to rant!  I will watch for you and join it - or argue - or whatever works.  At this point, ranting here and there is pretty much like therapy for what Charles Hugh Smith so properly termed "the burden of knowing" some time ago.

+1 for the ZH appreciation.


Gringo Viejo's picture

centerline: wanted to share with you my old  sense of "fun". My bud (Larry) and I walked into a bar in Martinez, Calif. called "Oscar's" in 1978 at closing time (2:00am). There was 1 (and only 1) guy sitting at the bar with a swollen jaw. We bought him a drink and he allowed as he had an impacted wisdom tooth. We took him outside, had him lay down, and attached a nylon fishing line to his tooth and had him lay in the street, and tied the other end to the bumper of my '74 dodge p/u truck. I pulled away in 2nd gear (manual shift), and pulled the tooth... but we damn near left him a "hare lip".