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Sign “O” the Times

July 23rd, 2014 - 5:09 am


The CBO has a dire warning about the rapid rise in publicly-held federal debt, reported here by Gene Epstein:

Based on its “extended baseline” scenario, which assumes no change in laws, the CBO foresees the debt soaring above 100% by the late 2030s and rising rapidly from there. Based on its “extended alternative fiscal scenario,” which essentially consists of informed judgments on how the budgetary situation is likely to play out in the real world of politics, the agency’s projections are far more dire: The debt-to-GDP ratio would rise above 180% by the late 2030s and continue climbing from there.

Either way, in the CBO’s understated language, the “debt would be on an upward path, relative to the size of the economy, a trend that could not be sustained indefinitely.” That unsustainable upward path is fraught with risks. And while it is generally true that long-term forecasts are not worth betting on, this one is too plausible to ignore. The next dozen years will be the relative calm before the storm because the retiring baby boomers have yet to reach critical mass. This year, they will range in age from 50 to 68; 12 years from now, the range will be 62 to 80. Combine that with slow expansion of the working-age population, and the grim demographics are virtually baked in the cake.

Washington collected more in revenue that ever before last year, yet the deficit was nearly 50% bigger than George W. Bush’s worst non-TARP year. I don’t include TARP because that was a one-time expenditure, most of which has since been paid back, partly masking the true size of Obama’s first-term deficits. Bush’s worst non-TARP year was also the most expensive year of our wars in Afghanistan and Iraq — one of which is over, and the other is winding down.

So why the big deficits today? We’re expanding the welfare state (personal and corporate) on credit, which unlike spending on wars or TARP, never ends.

Well, right up until the financial collapse and/or hyperinflation.

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Great article, Stephen. I'm a recently retired "bean counter" and I find these numbers horrifying. No one in America has an excuse to be uninformed about what is going on. has the president's 2015 budget proposal and Table 7.1 gives past and projected debt, based on sunny thinking. LOOK!, Table 7.l:

US Treasury Debt :
2006 8,451,350
2007 8,950,744
2008 9,986,082
2009 11,875,851
2010 13,528,807
2011 14,764,222
2012 16,050,921
2013 16,719,434
2014 estimate 17,892,637
2015 estimate 18,713,486
2016 estimate 19,511,611
2017 estimate 20,261,711
2018 estimate 20,961,055
2019 estimate 21,670,744

What is also deceptive is that the budget assumes the world's central banks will keep short-term interest rates in the 1% -2% range. I was working at a Federal Reserve Bank branch in the second half of the 1970s when interest rates paid on Treasury Bills ranged from 9% - 14%.

The president's budget projections ought to give multiple interest rate scenarios, pointing out when the government will either default or stiff its commitments for social or defense purposes, or stiff its debt holders (a la Greece debt crisis).

Interest rate inflation shock could blow these 2015 budget deficit projections into the stratosphere.

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27 weeks ago
27 weeks ago Link To Comment
Thanks for this reminder. I've written several times on what *will* happen to our interest payments when our short-term debt instruments must be refinanced under higher rates in the coming years.

As interest rates return to normal, our interest payments will balloon to half a trillion dollars in fairly short order -- on their way to a trillion dollars a year, every year. At that point there's no getting out from under except via Weimar.
27 weeks ago
27 weeks ago Link To Comment
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