To Obama And Congress: READ THIS (Debt)


Ok, so I just got done listening to the TOTUS once again pontificate about how moderate changes in the budget can make things work.

This is a lie.

Here’s another spreadsheet proving it – if we do not cut this crap out right now, we will become Greece.

I know you don’t want to hear this.  I know full well that there are a lot of people who believe they’re entitled to their benefits, to their Medicare, to their Social Security, to their Welfare and Food Stamps.

I understand.

The math doesn’t care what you claim you’re entitled to, nor what I believe you’re entitled to, nor what Congress wishes to grant you.

Here are the facts:

  • Government debt has grown 11% in each year for the last three years, more or less.  This is a fact which you can verify from the Treasury’s “Debt To The Penny” series. Please do so, because I hate having to post the numbers after someone pops up and claims I’m lying.
  • GDP growth since 2000 has averaged 4.1%.  I’ll use that number, even though our current GDP rate is under 2%.  This spreadsheet is a lot worse at 2.1%; government interest expense exceeds GDP (or government size) about 10 years faster!
  • I am using a blended interest rate of 3% on government debt.  This is consistent with the Treasury’s own current numbers.  It is also very low on a historical basis.  I presume it will not rise, which is likely foolish.  If it rises, the spreadsheet gets a lot worse.
  • I am using a government growth rate, all-in, of 5%.  This provides us a doubling time of about 14 years.  This is too conservative since 2000 (government has doubled in size in the decade, which is about 7%) but I am assuming we cannot maintain 7%.

Here’s the deal.  With these assumptions right now interest expense is about 11.3% of government’s total budget.  Within ten years it is 21.3%.  In 10 more it will be 40.52%.  In 10 more, that is 30 years from now it will be 76.98% (!) – in theory.  And in 35 years, it will consume the entire government budget.

Of course in 30 years interest expense will not be 3/4 of the federal budget.  Long before then the market will say “bullcrap!” and blow the entire charade to beyond the orbit of Pluto, much as happened in Greece and Ireland, and which threatens to occur in Italy.

If you believe we can fix this on a path that “stops accumulating the debt” in ten years, remember two things:

  1. It’s roughly twice as bad in terms of interest expense as a percentage of the budget in 10 years as it is now, which means that twice as much harm in programs will have to be absorbed then as now, and the damage to GDP will be twice as bad.
  2. Cutting the size of government temporarily makes the ratios worse! That is, there’s lots of pain in resolving this problem.

Ten years from now it is entirely possible that we will have gone too far to absorb that pain in attempted resolution.  There’s no precise way to know, but it is reasonable to assume this is the case, given these metrics., and the spreadsheet I have put forward is conservative in its assumptions.

The bottom line is this folks: Debt must never, ever grow faster than GDP does, whether that debt is in a given sector (e.g. government, consumer, financial, etc) or in the nation as a whole.

We therefore must balance the federal budget right now and accept the economic contraction that will come when we do it.  Yes, it will be bad – very bad – in the short term for the economy to do this.  But it’s worse now than it would have been in 2007 when I started The Market Ticker and the longer we wait the worse it will get, no matter what else we do.

Go ahead and download the spreadsheet and play with the assumptions.  The fact is simple as I pointed out before, and it applies to government as well as the general economy. For any growth rate in debt that exceeds that of GDP which has any positive rate of interest, you will eventually go bankrupt.

We argue only when, not if; this outcome is a consequence of indisputable mathematical facts.

Spreadsheet link: https://spreadsheets.google.com/spreadsheet/ccc?key=toI80r-WEj1hmDCfEZDotmw#gid=0

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