BenderRodriguez

Well said sir. Well said

Andy

You're being vague. Are you referring to government, corporate, and/or individual debt levels?
If you're saying that current levels of debt can no longer be serviced, please note that default rates are declining.
　
If you're talking about Andy's finances, I have a mortgage that I could pay off with my non-retirement savings but at less than 4%, it's 'cheap money'. Our household has no other debt - we pay off our credit card balances every month and we haven't had an auto loan in more than a decade. When we buy a car, we pay cash for it.

What timeframe? The devil's in the details. 2015? 2016? 2030?
The Federal Reserve has been jawboning about raising interest rates for a very long time. However, it's difficult to raise interest rates when the USD is so strong and US interest rates are higher than most of the rest of the developed world.

This is a very complex subject that can't be summed up in a couple of paragraphs. It's not as simple as saying that interest rates are too low.

Please read the definition of 'Liquidity Trap'. It's different than what you think it means.

You keep talking about excessive debt. Government, corporate, and/or individual? Please specify.

If you're talking about government debt, there are some governments with debt levels higher than they're able to service. However, most countries are able to service their current debt levels. Approximately 6% of the federal budget goes to servicing the interest on our debt.

Pending inflation - based on what? Aggregate demand is extremely weak and the velocity of M2 money stock is at an historic low. And declining. Until the velocity of money increases, it is going to be very hard to have any noticeable inflation.

Wealth devaluation ... Which assets are going to be devalued? All? Are there no 'safe haven' asset classes? You're using too broad a brush stroke.

Long time if ever - are you talking in your lifetime in the US? Because there have been areas of the world that have seen hyperinflation in your lifetime. And the US has seen high rates of inflation in the past. Hyperinflation (which is what you seem to suggest) has occurred at different times throughout history.

You don't know Keynes. The type of Keynesian economics that's being used today is what I call faux-Keynesian economics. I think if you read Keynesian theory, you'd probably agree with a lot of the concepts.

Keynesian theory, in a nutshell, is that you run government deficits during economic downturns to stimulate aggregate demand and run government surpluses during economic prosperity. http://independentreport.blogspot.com/2012/03/john-maynard-keynes-was-right-and-not.html

Let me know the last time you've heard a 'Keynesian' argue for budget surpluses. They don't; they only advocate deficit spending to stimulate the economy. That's not Keynesian economics, and probably a big reason why Keynes HATED large governments.

??
None of this (government debt levels) is new. People have complained about excessive government debt throughout history. Sometimes they have been correct and governments have defaulted, but most of the time, economies have grown their way out of excess debt levels.

Ross Perot (who I voted for twice) was a very popular candidate in 1992 and 1996 due to his concern over excessive federal debt levels - his predictions still haven't come to fruition. And if I took the time, I could pull up countless other historical examples of where we've been warned about excessive government debt.

Unfortunately, the ratio of US public debt to GDP first exceeded 100% approx. early 2013. I think it's now 102-103% of GDP.



Gloopy, don't mistake me for being happy or complacent about government debt levels. I'm not; I'd love to see us run a surplus for several years to work down the size of the debt. However, the sky isn't falling and current debt levels are serviceable.

BenderRodriguez

Andy,
Your post is very articulate and obviously from an educated POV. What I have highlighted above, essentially the concern, and the validation of that concern is what I think has (me) and many people like the poster concerned. During Perot's time, I do not believe the debt service was approaching the percentage of GDP like it is now. Today it is not on a trajectory that will allow what you assert in the last paragraph, and that is to manage those levels of debt. I cannot get past the math. To me it seems the propensity of the liberal left in particular is to tax our way out of this, and the math simply won't support that. THAT is why I believe we are in trouble as a nation. The PIIGS tend to bear this out, in particular the "G" portion of that acronym. Great discussion.

Andy

Thank you; like I said in my last post, please don't mistake my posts for lack of concern over the size of the debt. I'm not happy about it, but it is not a short term threat to our economy.

As far as interest on the debt, in 1992, it was 14% of the federal budget. In 2015, it's 6%. Actual numbers:
1992: GDP $9.15T, Fed Budget $1.96T, Interest on debt $313B.
2014: GDP $16T, Fed Budget $3.24T, Interest on debt $212B.

Incredibly, the current amount (not adjusted for inflation) of interest paid on our debt is less than we paid back in 1992. That's what lower interest rates have done to our ability to service our debt.

Current worldwide interest rates are historically low, but not to the same extreme that interest rates back in the 1980s/90s were historically high. The data is getting a bit difficult to locate anymore and there are some adjustments needed (due to the way that mortgages are structured), but if you go back to before the mid-1960s, you'll find that mortgage rates today aren't much lower than they were prior to the mid-1960s.

What drove interest rates so high starting in the mid-1960s until the 1990s were the baby boomers. If you think about your lifetime and when you have needed to borrow money vs when you have saved money, a typical person starts borrowing money when they go to college and that trend continues to approx. their mid-40s - one is busy accumulating assets - car, home, furniture, etc - during that time. Past their mid-40s, most people are geared toward saving for retirement. What the baby boomers have done is create excess demand for money (mid-60s to 90s) and now excess supply of money (starting in 1990s saving for retirement).

Harry Dent has written extensively about the impact of baby boomers on the economy. However, take him with a HUGE grain of salt because there are flaws in his theories large enough to drive a convoy of trucks through. He's like a broken clock - correct twice a day, but wrong for the other 23 hrs 58 min.

But back to the subject - the maximum debt level the US can withstand and still service it. The problem, as you can see from the 1992 vs 2014 example, is interest rates. That's a bit of a dodge, but the number I've read in several places is that up to 175% of GDP is not a problem for a country to service the debt. Beyond that, things can get dicey.

As far as taxes go, if the tax base stops growing, tax rates can be raised to service the debt. A modern nation's ability to accurately account for individual/corporate income and to tax them is a big reason why modern governments have moved away from the gold standard. Rather than back one's currency with gold, it's now backed by an implied ability of that nation to collect taxes.

As far as Greece goes, it's a national sport there to evade taxes. That, combined with their bloated government payrolls and love of government pensions, are the reasons why Greece is essentially insolvent. Great article on the subject: This is the real reason Greece has a massive tax-evasion problem - Business Insider


Am I unhappy with the amount of government debt? Yes. Do I worry about it? Not at the moment.

Sorry for steering this thread down a different road.

BenderRodriguez

It's a nice diversion.

Carl Spackler

Good stuff Andy, but here's my concern: Everything that has happened in the last 15 years regarding the explosion of our national debt has happened during a time when the Fed was able to influence bond rates by 1. setting a near zero discount rate and 2. purchasing bonds to keep their prices high and their yields low. What happens when the Fed's actions stop influencing bond rates and market forces takeover? When that day happens, there's going to be some painful change as the market reverts to the mean. I just can't figure out when that will be because we're well past when I thought it would be.

Carl

Andy

Good question. I don't have the answer for you but what timeframe are you using for the calculating the mean in interest rates?

When the Fed was winding down QE, there were a lot of concerns that interest rates would rise - myself included. Bond yields (interest rates) have actually fallen since QE ended.

As far as mean reversion, 10 year rates (currently 1.91%) would rise to around 3-4% as long as you discard the rates from the mid-60s to 2000. The rates from the mid-60s to 2000 are the larger deviation from the mean, not current rates. I know that's hard to believe due to our recency bias, but if you look at longer term interest rate charts, you'll see the huge spike in interest rates during that 35 year or so period.
The Fed's chart only goes back to 1962 in this link: https://research.stlouisfed.org/fred2/series/DGS10/
I've seen longer term interest rate charts - ones that have gone back to the start of the US and some beyond that - and rates have been below 5% for most of history.

I've watched Japan for many years, expecting them to eventually have problems. Their ratio of public debt to GDP is ~225% (more than twice the US), yet their ten year bond is yielding 0.32%. If there were a country that is more likely to have the issues you're talking about, it would be Japan. Yet their inflation rate is barely above zero.

Carl Spackler

The timeframe I use for a reversion to the mean is my lifetime...which may be too narrow a view. The chart on your link starts in 1962 when I was starting school, so that's roughly my lifetime. I'm struck by how seldom rates were below 5%, but amazed at how seldom rates were below 2.5%...really only the last few years. To me, that is screaming for a reversion to the mean.

With regard to Japan, that's an interesting case because their public debt has not been due to purchasing their own bonds (as we have). It was a national attempt at making themselves an industrial powerhouse after WWII. Their culture is one where savings is revered, thus a ton of money looking for a safe place to hide keeping interest rates low. They are not a culture of consumerism as we are, so a comparison to us is hard when discussing rates versus public debt.

If this current Fed policy of printing money to buy bonds was a long term viable solution, it would have been tried long ago. There's not been a time in my life where Fed intervention has ever been this extreme. The question is if/when market forces will trump Fed actions. That has me stumped.

Carl

Andy

Here's a chart starting in 1927: http://seekingalpha.com/article/4628...0-year-history
Here's one going back to 1900: http://observationsandnotes.blogspot...e-history.html

Interesting topic. I've been thinking about this, and the causes of the US's low aggregate demand. My best guess is that most households have enough 'stuff' and aren't feeling deprived by not having more toys.
Although savings rates in the US are too low in my opinion, they've been increasing a bit since the 'great recession' of 2008.

Mesabah

The Fed's actions are/were clearly to support the banks at all costs, the employment mandate, and 2% inflation is bullocks. The plan is to borrow from the discount window at ZIRP, then park that money right into government bonds; Instant taxpayer cash infusion. The Fed may jawbone the market, but they can't raise rates, lest they have a plan to replace that cash flow. They clearly forge the job report whenever it suits their agenda.

In general though, since mark to market accounting was modified in 2009, it is almost impossible to know when this economy will turn. You now have to study peak credit - the level of additional appetite and/or ability, main street has to take on additional debt, and where that stops. The economy will slow grind from then on. I don't expect we will see another 2008-2010 though.