Here Is Goldman's Chart Showing Why The US Is Headed For "Banana Republic" Status

Earlier today we discussed a report by Goldman Sachs which, when summarized, suggested that unless something significant changes in the coming years, the current US fiscal policy will lead to a debt catastrophe. In an unprecedented warning, the bank which spawned Trump's chief economic advisor Gary Cohn, ironically the architect behind Trump's fiscal strategy, warned that "the continued growth of public debt raises eventual sustainability questions if left unchecked."

It is worth highlighting that for Goldman to warn that the US fiscal and debt trajectory is unsustainable is quite unprecedented, especially since it is the bank's former President and COO who has put the US on that path.

And while we urge readers to get acquainted with Goldman's list of concerns, all of which are very troubling, there is one specific chart which lays out clearly why the US is now headed for "banana republic" status amid developed economies when it comes to US debt sustainability, or in this case lack thereof.

That chart is below, and it shows total projected US Federal Debt on one axis, and US interest expense as a % of GDP on the other. The result is the red dot in the top right.

This is how Goldman puts it:

The US appears to be headed into uncharted territoryat least for US fiscal policyregarding the relationship between interest expense and the debt level.

As shown in Exhibit 11, interest expense considerably exceeded the current level during the late 1980s and early 1990s, though the debt level was moderate. By contrast, the debt level was slightly higher during and just after World War II than it is today, while the level of interest expense was similar.

However, we project that, if Congress continues to extend existing policies, including the recently enacted tax and spending legislation, federal debt will slightly exceed 100% of GDP and interest expense will rise to around 3.5% of GDP, putting the US in a worse fiscal position than the experience of the 1940s or 1990s.

While Goldman is absolutely correct, all else equal, we doubt all else will be equal in a few years when US debt is well above 100% of GDP, and the blended US interest expense is the highest it has ever been in US history. As we noted earlier, while a sovereign debt crisis appears inevitable under the conditions laid out be Goldman, the only loophole is "if the Fed proceeds to monetize the deficit once again as it did in 2009-2015, sending yields plunging as the next and final episode of QE is unveiled."

Which, we concluded, "is precisely what will happen, and is also why Goldman is already starting to load up on all Treasuries it can buy."

And while the next episode of QE will in no way resolve the looming US debt crisis - and in fact make it even worse eventually - it will at least again kick the can for a few more years, something in which the Fed has demonstrated a remarkable effectiveness time and again. Meanwhile, as even Goldman now admits, the incremental debt incurred as part of the next episode of debt monetization "would put the US onto an even less sustainable long-term trend."

Who knows, maybe one of these days Goldman will even start pitching cryptocurrencies. After all, as Deutsche Bank already wrote, "If Trust In Monetary & Political Stability Were Lost, People Would Turn To Cryptocurrencies." And if there is one thing an unsustainable long-term trend for the US means, it is the guaranteed loss of "trust in monetary and political stability."


philipat D.T.Barnum Mon, 02/19/2018 - 18:22 Permalink

Hold on, unless GDP suddenly jumped by 20%, at $21 Trillion (or thereabouts, what's a Trillion here or there?), US Federal Debt (not including State and Local or unfunded liabilities) already does exceed 100% of GDP.

So where is Goldman getting its data from and would somebody kindly send this article to Congress marked "With love from Rand Paul"....

In reply to by D.T.Barnum

AbbeBrel ejmoosa Tue, 02/20/2018 - 03:27 Permalink

Wait wait I don't get it. The Treasury sells bonds, the Fed buys the bonds with printed money, then refunds the interest payments by the Treasury back to the Treasury. When the bond matures, the Treasury sells another bond to roll it over and pays the Fed the bond principal. Poof that bond ceases to exist. Sounds like free money to me. Pretty much Japan mode. So what is the problem, LOL.

In reply to by ejmoosa

HRClinton shankster Mon, 02/19/2018 - 17:59 Permalink

Uncharted Territory?  There be dragons.

“Our weaknesses are always evident, both to ourselves and others. But our strengths are hidden until we choose to reveal them--and that is when we are truly tested. When all that we have within is exposed, and we may no longer blame our inadequacies for our failure, but must instead depend upon our strengths to succeed ... that is when the measure of a man is taken, my boy.” 
― James A. OwenHere, There Be Dragons

In reply to by shankster

Charles Offdensen Mon, 02/19/2018 - 17:35 Permalink

I think our Congress and Justice system is a greater illustration of our Banana Republic status than our debt.  Every country has its share of debt and they are going to print to infinity until the reset.  Convention of the States is our only peaceful hope.

Mini-Me Mon, 02/19/2018 - 17:41 Permalink

Repudiate the debt.  Given a choice between bailing out Treasury holders and those of us wise enough to understand the dollar will be worthless, I vote to screw the idiots who decided to lend money to an insolvent Uncle Sam.

CHoward Mon, 02/19/2018 - 17:41 Permalink

We're (the U.S.) showing the world all kinds of neat ways to become a banana republic.  There's more than one way to skin an entire country.

Alchemedes Mon, 02/19/2018 - 17:47 Permalink

People would turn to cryptocurrencies until the authorities hack the system, and/or ban them...

"Gold is money. Everything else is credit" -  James Pierpont Morgan.

TheMayor Mon, 02/19/2018 - 17:48 Permalink

Why were the parents in Florida too cheap to train and arm their schools to protect the children?

The smart school districts protect students with properly armed and trained security, teachers, coaches, janitors and administrators.


Offthebeach TheMayor Tue, 02/20/2018 - 08:48 Permalink

Government schools is as to intelectual development as government housing is to charming neighborhoods.

 What do you expect?  Poorest quality hires, certificate papers up the wazoo.  Low quality as far as poor metrics can guesstimate .  High cost. Like government union labor building road projects..

No to zero personal incentives nor competition in price, time or quality. 

In reply to by TheMayor

HRH of Aquitaine 2.0 FreeShitter Mon, 02/19/2018 - 19:28 Permalink

What do you see? I like using my grocery store as a guage. Shopped at the same grocery store, mostly, for 15 years. I remember when I dressed up to go shopping. That is one thing I notice now. People wear anything and don't even make an effort. I don't always dress up like I used to but I do make an effort to be presentable (shower, clean clothes, eyebrows, foundation, earrings, necklace, ring, lipstick). Surprising how many people don't get to the shower these days.

I see older people checking prices, using coupons (sad because the best deals are from your phone) and looking worried. I see more men shopping. I noticed a very thin Russian gal at the meat counter that was shoplifting large pieces of custom meat right in front of everyone. She was ordering the custom cuts and putting them right into her bag. By how thin she was I knew she wasn't eating that meat. I doubt that she was stopped leaving the store. Overt theft prevention is frowned upon as it upsets the customers. (I overheard her talking to the meat counter butcher and recognized the accent).

Back in November or December I remember hearing from a cashier that someone had slit their wrists and was running through the store, bleeding. A guy. Quite the drama.

In reply to by FreeShitter

Let it Go Mon, 02/19/2018 - 18:04 Permalink

I thought the Goldman Sachs "Boys" were now running the show and so far I'm not impressed!

To the American people, a rising deficit that has yet to yield dire consequences has given us a false sense of security. It is also clear that running up debt is far easier than paying it off. As things stand America continues to rack up a deficit each year of nearly $2,500 for every man woman and child in the country, such deficits were unheard of in the past unless it was during a major war.

The fact is with the artificially low-interest rates of today many people seem to have little desire to cut spending. We are literally gorging on debt, and most Americans seem to think that it is just fine and dandy to wildly run up debt as if there is no tomorrow. More on this topic, and some ugly numbers, in the article below.

 http://Is The Growing National Debt No Longer.A Major Issue? html

helloimjohnnycat Let it Go Mon, 02/19/2018 - 18:21 Permalink

keep voting, and keep voting for joo lawyers.

if you like your enslavement, you can keep it !

sounds familiar, yes ?

Let that interest rise & rise !

I got mine and didn't squander it.

At some point the %-pendulum will swing...

fatt fukks who borrowed & borrowed will get their old bellies cut.... lean / mean savers will recoup a bit.

It all averages out !


In reply to by Let it Go

There Mon, 02/19/2018 - 18:09 Permalink

Defense spending will have a noble purpose. Increase the capability of offensive measures to capture assets and productive territory as in the 18th and 19th century.

MrBoompi Mon, 02/19/2018 - 19:12 Permalink

The goal of the oligarchs described decades ago by Prof Carrol Quigley in Tragedy and Hope is to turn every country on the planet into a goddamned banana republic.  Anyone paying attention all these years is not shocked at all.