6 ms·

Agreed. Further, there's little evidence that Debt-to-GDP over 100% (despite "feeling" meaningful, because, 100%!) has any kind of predictive value for the lon

by yahelc 12y ago

Agreed. Further, there's little evidence that Debt-to-GDP over 100% (despite "feeling" meaningful, because, 100%!) has any kind of predictive value for the long term direction of an economy, particularly one that has unusually low interest rates. If Debt-to-GDP were a problem for the US, you'd expect higher interest rates, not lower ones, as investors would be demanding higher returns on US debt. The fact that interest rates on Treasury bonds remain so low, despite our debt levels and despite certain political figures repeatedly attempting to force the US Government to default on that debt, is prima facie refutation of the idea that no one in the market actually thinks US debt levels pose a major macroeconomic problem in the short to medium term.

jeffdavis 12y ago
The thing that worries me about our debt is that it's not like the rates are locked-in for 1000 years. After bonds mature, we need to issue new bonds to pay for them. And if the interest rates are higher at the time, the new debt will have a higher interest rate (I guess, technically, the bonds will sell for a lower price, which has the same effect). Paying our current level of interest on our debt is not crushing. But it's not hard to imagine the rates tripling (or more) considering how close to zero the rates are now. Then we are over $1 trillion/yr in debt service (if my calculations are correct). Combined with what seems like a structural deficit, I don't see any good way we'd get out of that. In other words, we're not falling off a cliff now, but it seems like fragile situation.
- pingburg 12y ago
  Not being sarcastic here. 2013 A = Debt is around: $17.5 trillion B = Debt Service: $416 billion C = Average Rate: 2.38% ($416 billion / $17.5 trillion) D = U.S. Tax Revenue: +/- $2.8 Trillion Things won't get interesting until B approaches D. So one way of looking at is if everything remained constant (which it won't) you'd need 15% interest rates on the current debt for debt service to approach tax revenue. If interest rates stay the same you could increase the debt to $128 trillion. Reference: Debt: http://www.treasurydirect.gov/govt/reports/ir/ir_expense.htm http://www.treasurydirect.gov/govt/reports/ir/ir_expense.htm Debt Service: http://www.treasurydirect.gov/govt/reports/ir/ir_expense.htm http://www.treasurydirect.gov/govt/reports/ir/ir_expense.htm Tax Revenue: http://www.usgovernmentrevenue.com/ http://www.usgovernmentrevenue.com/
  - jeffdavis 12y ago
    "Things won't get interesting until B approaches D." I'd say things would get pretty interesting well before that point. B=D is just the point at which a default is inevitable (unless much higher tax revenue is achievable without causing other problems). But the problem is that the interest rates are so low now that large increases are not outlandish. 7 years ago, the rate was more than double what it is now. Looking at the graph in the article, in the 80's it was over 10%, more than 4X the current rate (which would imply 1.6 trillion in debt service). It seems like we're making a big bet that interest rates are down permanently. That may be true, but it seems like a fragile assumption to me.
    - muzz 12y ago
      Interest payments as a percentage of GDP are actually much lower now than they've been in the past: http://research.stlouisfed.org/fred2/series/FYOIGDA188S http://research.stlouisfed.org/fred2/series/FYOIGDA188S
      - JetSpiegel 12y ago
        Interest doesn't get come out of the GDP, only the Government pays it.
        dllthomas 12y ago
        The government pays it, ultimately, out of tax revenues derived from GDP.
      - jeffdavis 12y ago
        That doesn't dispute my point at all. I'm not worried about the payments now. I'm worried about the payments if interest rates go up. And we shouldn't be surprised if rates go up substantially, because they are at historic lows right now.
        muzz 12y ago
- AJ007 12y ago
  My guidance to others, when they ask about US debt, I suggest they watch Japan. When Japan's interest rates rise, even just a little, their debt will become unserviceable. Once that happens, it will be time to think hard about US debt. The plan is clearly to inflate out of it. Survivable for the wealthy, devastating for everyone else. The blog post raises some fair points, but the author does a pretty poor job at getting any point across. The most concerning things right now are: low interest rates on very high risk debt, continued and dramatic growth of derivatives (you fail, I fail, we all fail), and China's decision to push the 2008 correction in to the future finally running out of steam. The geo-political issues in the Middle East, North Africa, and Asia are a whole other cause for concern. I think the risks now are still fairly benign compared to what was faced during the Cold War (though we still build new nuclear weapons and delivery vehicles, Russia fell short of its recent goal of 300 and instead has built 30 so far.)
  - nerfhammer 12y ago
    > The plan is clearly to inflate out of it. [[Citation needed]]
  - ArkyBeagle 12y ago
    There is probably 10% slack right now before you even get to mild inflation. What's concerning to me is geopolitical instability while the economy is teetering on deflation. This state is strongly correlated with big wars.
- nhaehnle 12y ago
  However, it is hard to imagine that interest rates would increase without a serious uptick in economic performance. Such an uptick would automatically go hand in hand with increased tax revenues and lower spending (because social safety net spending would shrink automatically). Basically, any scenario in which interest rates grow are scenarios in which automatic stabilizers will reduce the government deficit in other places. It's a healthy system in which the feedback mechanism go in the right (i.e. stabilizing) direction.
  - dllthomas 12y ago
    Why is that hard to imagine? If, hypothetically, our economy fell off a Great Depression style cliff, wouldn't that make it harder to pay our debt, expectation of which would force rates up, and be somewhat self-fulfilling?
  - jeffdavis 12y ago
    "However, it is hard to imagine that interest rates would increase without a serious uptick in economic performance." It's not that hard to imagine; what you describe is essentially Stagflation. You may consider it unlikely, but there are some known potential causes[1]. As I understand it, Stagflation happens when increased demand is less able to stimulate increased supply than one might expect. As mentioned in [1], an oil supply shock could be a cause. That is not outlandish given the current instability in the middle east and our tense relationship with other oil producers (Russia and Venezuela). The US and Canada do produce a lot of oil, which may offer insulation, but I don't think that's necessarily a defense. Another cause listed is tough regulatory atmosphere. For instance, if the EPA decides to strongly curb CO2 emissions, or misguided labor laws come into effect, or the healthcare system in the US gets even worse. Again, not outlandish. [1] http://en.wikipedia.org/wiki/Stagflation http://en.wikipedia.org/wiki/Stagflation EDIT: reworded for clarity
    - nhaehnle 12y ago
      Ah, right. I still think there are two mitigating factors here to what I said. First: In the stagflation of the 1970s (which is really the only significant empirical data point we can draw from), increased interest rates were a political choice made by the central bank rather than an economic necessity. Second, and more importantly: Stagflation is characterized by inflation, which means that nominal GDP grows even while real GDP is stagnating. Since real GDP is irrelevant to the debt-to-GDP ratio (witness the debt-to-GDP ratio through the 1970s), the conclusions for whether one should worry about the debt-to-GDP ratio remains the same as far as I can tell.
- ArkyBeagle 12y ago
  Generally, when interest rates pick back up, revenues rise faster. We're fragile because ( IMO ) we're running the money supply too lean - especially for people who are in the grey market economy.
pingburg 12y ago
> The fact that interest rates on Treasury bonds remain so low, despite our debt levels and despite certain political figures repeatedly attempting to force the US Government to default on that debt, is prima facie refutation of the idea that no one in the market actually thinks US debt levels pose a major macroeconomic problem in the short to medium term. With respect, I don't think it's accurate that the fact that bond rates remain low correlates to evidence that there's no major macroeconomic problem. Just take a look at the Federal Reserve's balance sheet that was relatively stable for many years has quadrupled in 5 years. Reference: Chart: http://research.stlouisfed.org/fred2/series/RSBKCRNS http://research.stlouisfed.org/fred2/series/RSBKCRNS Reference: Balance Sheet: http://www.federalreserve.gov/releases/h41/Current/ http://www.federalreserve.gov/releases/h41/Current/
DINKDINK 12y ago
>The fact that interest rates on Treasury bonds remain so low, despite our debt levels and despite certain political figures repeatedly attempting to force the US Government to default on that debt, is prima facie refutation of the idea that no one in the market actually thinks US debt levels pose a major macroeconomic problem in the short to medium term. Not necessarily. If you have to ask yourself what the country had to do to keep those rates from changing. The more a country is in debt (especially to other countries) the more their foreign debtors have leverage over what policies the debted country can enact. For the sake of arguement, let's say that China decided to annex Alaska. If we retorted with a threat of military action, China could come back and say we'll increase your interest rates. Also high debt to GDP ratio makes printing money as a solution more attractive for a government. Inflation is a theft from everyone.
- dllthomas 12y ago
  "Inflation is a theft from everyone." Inflation is from those with assets denominated in dollars (if they are not inflation adjusted). It is to those with liabilities denominated in dollars (if they are not inflation adjusted) and to the people introducing the new dollars into circulation. In the case of the government printing money, that's the government (obviously) and it's fairly reasonable to consider it a tax like any other. A somewhat regressive tax, since the more wealthy usually have more flexibility about how they store their wealth, but I don't know how it compares to sales taxes.
- pdovy 12y ago
  That doesn't really seem to follow, to me. The worst a single creditor could do is not bid, or bid for higher rates in future treasury auctions. The terms of existing debt are fixed. The impact of this wouldn't be large unless other creditors followed suit - there are many parties interested in buying up US debt. Furthermore, if a holder of US debt declared war on the US, I wonder if that wouldn't be viewed as a credible reason to default on that outstanding debt - certainly doesn't make much sense to be sending interest coupon payments to someone invading your country.
  - ChrisBland 12y ago

by yahelc 12y ago

jeffdavis 12y ago

The thing that worries me about our debt is that it's not like the rates are locked-in for 1000 years. After bonds mature, we need to issue new bonds to pay for them. And if the interest rates are higher at the time, the new debt will have a higher interest rate (I guess, technically, the bonds will sell for a lower price, which has the same effect). Paying our current level of interest on our debt is not crushing. But it's not hard to imagine the rates tripling (or more) considering how close to zero the rates are now. Then we are over $1 trillion/yr in debt service (if my calculations are correct). Combined with what seems like a structural deficit, I don't see any good way we'd get out of that. In other words, we're not falling off a cliff now, but it seems like fragile situation.

pingburg 12y ago
Not being sarcastic here. 2013 A = Debt is around: $17.5 trillion B = Debt Service: $416 billion C = Average Rate: 2.38% ($416 billion / $17.5 trillion) D = U.S. Tax Revenue: +/- $2.8 Trillion Things won't get interesting until B approaches D. So one way of looking at is if everything remained constant (which it won't) you'd need 15% interest rates on the current debt for debt service to approach tax revenue. If interest rates stay the same you could increase the debt to $128 trillion. Reference: Debt: http://www.treasurydirect.gov/govt/reports/ir/ir_expense.htm http://www.treasurydirect.gov/govt/reports/ir/ir_expense.htm Debt Service: http://www.treasurydirect.gov/govt/reports/ir/ir_expense.htm http://www.treasurydirect.gov/govt/reports/ir/ir_expense.htm Tax Revenue: http://www.usgovernmentrevenue.com/ http://www.usgovernmentrevenue.com/
- jeffdavis 12y ago
  "Things won't get interesting until B approaches D." I'd say things would get pretty interesting well before that point. B=D is just the point at which a default is inevitable (unless much higher tax revenue is achievable without causing other problems). But the problem is that the interest rates are so low now that large increases are not outlandish. 7 years ago, the rate was more than double what it is now. Looking at the graph in the article, in the 80's it was over 10%, more than 4X the current rate (which would imply 1.6 trillion in debt service). It seems like we're making a big bet that interest rates are down permanently. That may be true, but it seems like a fragile assumption to me.
  - muzz 12y ago
    Interest payments as a percentage of GDP are actually much lower now than they've been in the past: http://research.stlouisfed.org/fred2/series/FYOIGDA188S http://research.stlouisfed.org/fred2/series/FYOIGDA188S
    - JetSpiegel 12y ago
      Interest doesn't get come out of the GDP, only the Government pays it.
      - dllthomas 12y ago
        The government pays it, ultimately, out of tax revenues derived from GDP.
    - jeffdavis 12y ago
      That doesn't dispute my point at all. I'm not worried about the payments now. I'm worried about the payments if interest rates go up. And we shouldn't be surprised if rates go up substantially, because they are at historic lows right now.
      - muzz 12y ago
AJ007 12y ago
My guidance to others, when they ask about US debt, I suggest they watch Japan. When Japan's interest rates rise, even just a little, their debt will become unserviceable. Once that happens, it will be time to think hard about US debt. The plan is clearly to inflate out of it. Survivable for the wealthy, devastating for everyone else. The blog post raises some fair points, but the author does a pretty poor job at getting any point across. The most concerning things right now are: low interest rates on very high risk debt, continued and dramatic growth of derivatives (you fail, I fail, we all fail), and China's decision to push the 2008 correction in to the future finally running out of steam. The geo-political issues in the Middle East, North Africa, and Asia are a whole other cause for concern. I think the risks now are still fairly benign compared to what was faced during the Cold War (though we still build new nuclear weapons and delivery vehicles, Russia fell short of its recent goal of 300 and instead has built 30 so far.)
- nerfhammer 12y ago
  > The plan is clearly to inflate out of it. [[Citation needed]]
- ArkyBeagle 12y ago
  There is probably 10% slack right now before you even get to mild inflation. What's concerning to me is geopolitical instability while the economy is teetering on deflation. This state is strongly correlated with big wars.
nhaehnle 12y ago
However, it is hard to imagine that interest rates would increase without a serious uptick in economic performance. Such an uptick would automatically go hand in hand with increased tax revenues and lower spending (because social safety net spending would shrink automatically). Basically, any scenario in which interest rates grow are scenarios in which automatic stabilizers will reduce the government deficit in other places. It's a healthy system in which the feedback mechanism go in the right (i.e. stabilizing) direction.
- dllthomas 12y ago
  Why is that hard to imagine? If, hypothetically, our economy fell off a Great Depression style cliff, wouldn't that make it harder to pay our debt, expectation of which would force rates up, and be somewhat self-fulfilling?
- jeffdavis 12y ago
  "However, it is hard to imagine that interest rates would increase without a serious uptick in economic performance." It's not that hard to imagine; what you describe is essentially Stagflation. You may consider it unlikely, but there are some known potential causes[1]. As I understand it, Stagflation happens when increased demand is less able to stimulate increased supply than one might expect. As mentioned in [1], an oil supply shock could be a cause. That is not outlandish given the current instability in the middle east and our tense relationship with other oil producers (Russia and Venezuela). The US and Canada do produce a lot of oil, which may offer insulation, but I don't think that's necessarily a defense. Another cause listed is tough regulatory atmosphere. For instance, if the EPA decides to strongly curb CO2 emissions, or misguided labor laws come into effect, or the healthcare system in the US gets even worse. Again, not outlandish. [1] http://en.wikipedia.org/wiki/Stagflation http://en.wikipedia.org/wiki/Stagflation EDIT: reworded for clarity
  - nhaehnle 12y ago
    Ah, right. I still think there are two mitigating factors here to what I said. First: In the stagflation of the 1970s (which is really the only significant empirical data point we can draw from), increased interest rates were a political choice made by the central bank rather than an economic necessity. Second, and more importantly: Stagflation is characterized by inflation, which means that nominal GDP grows even while real GDP is stagnating. Since real GDP is irrelevant to the debt-to-GDP ratio (witness the debt-to-GDP ratio through the 1970s), the conclusions for whether one should worry about the debt-to-GDP ratio remains the same as far as I can tell.
ArkyBeagle 12y ago
Generally, when interest rates pick back up, revenues rise faster. We're fragile because ( IMO ) we're running the money supply too lean - especially for people who are in the grey market economy.

pingburg 12y ago

> The fact that interest rates on Treasury bonds remain so low, despite our debt levels and despite certain political figures repeatedly attempting to force the US Government to default on that debt, is prima facie refutation of the idea that no one in the market actually thinks US debt levels pose a major macroeconomic problem in the short to medium term. With respect, I don't think it's accurate that the fact that bond rates remain low correlates to evidence that there's no major macroeconomic problem. Just take a look at the Federal Reserve's balance sheet that was relatively stable for many years has quadrupled in 5 years. Reference: Chart: http://research.stlouisfed.org/fred2/series/RSBKCRNS http://research.stlouisfed.org/fred2/series/RSBKCRNS Reference: Balance Sheet: http://www.federalreserve.gov/releases/h41/Current/ http://www.federalreserve.gov/releases/h41/Current/

DINKDINK 12y ago

>The fact that interest rates on Treasury bonds remain so low, despite our debt levels and despite certain political figures repeatedly attempting to force the US Government to default on that debt, is prima facie refutation of the idea that no one in the market actually thinks US debt levels pose a major macroeconomic problem in the short to medium term. Not necessarily. If you have to ask yourself what the country had to do to keep those rates from changing. The more a country is in debt (especially to other countries) the more their foreign debtors have leverage over what policies the debted country can enact. For the sake of arguement, let's say that China decided to annex Alaska. If we retorted with a threat of military action, China could come back and say we'll increase your interest rates. Also high debt to GDP ratio makes printing money as a solution more attractive for a government. Inflation is a theft from everyone.

dllthomas 12y ago
"Inflation is a theft from everyone." Inflation is from those with assets denominated in dollars (if they are not inflation adjusted). It is to those with liabilities denominated in dollars (if they are not inflation adjusted) and to the people introducing the new dollars into circulation. In the case of the government printing money, that's the government (obviously) and it's fairly reasonable to consider it a tax like any other. A somewhat regressive tax, since the more wealthy usually have more flexibility about how they store their wealth, but I don't know how it compares to sales taxes.
pdovy 12y ago
That doesn't really seem to follow, to me. The worst a single creditor could do is not bid, or bid for higher rates in future treasury auctions. The terms of existing debt are fixed. The impact of this wouldn't be large unless other creditors followed suit - there are many parties interested in buying up US debt. Furthermore, if a holder of US debt declared war on the US, I wonder if that wouldn't be viewed as a credible reason to default on that outstanding debt - certainly doesn't make much sense to be sending interest coupon payments to someone invading your country.
- ChrisBland 12y ago