14 Wednesday Dec 2016
Posted | December 14, 2016 3:00:23 | Economics
Despite GDP rising, unemployment rate falling, and interest rates near zero, interest on the national debt has soared.
Here’s a quick chart to reflect on, given the consensus opinion there will be 3 rate hikes this year.
What can possibly go wrong?
Addendum
A question keeps coming up as to why debt increases far faster then the alleged yearly deficit.
Here is the answer: US Deficit at $590 Billion but Debt Up $1.2 trillion: Sleight of Hand Magic.
Mike “Mish” Shedlock
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$US (DXY) took out multi year high this afternoon.
DXY > 102
If spending on infrastructure, military and entitlements are ‘soaring’ then how do we have a recession? A recession means the amount of goods and services our economy produces declines rather than grows.
If the economy does not go into recession, then interest payments go up but on the base of a growing economy.
Fed only projecting 2% GDP growth
Deficits expected to soar (and will likely far exceed expectations)
I expect GDP to miss estimates as it pretty much has for years
We are driving in a car together on a 1,000 mile trip. You drive for 300 miles in about 3 1/4 hours and we switch. You expect me to drive about the same way so you estimate in around another 3 and 1/4 hour we’ll be about 600 miles into our trip. But as soon as we exchange seats and buckle our seat belts, I pull out some crystal meth and smoke it up, then chase it down with some crack…I then floor it and we tear out of there.
Your previous forecast was absolutely rational but will also be absolutely wrong.
Finally. That’s the issue. Mr. Bush (II) and Mr. Obama have made our debt relevant as a fatal flaw in the system. Before Mr. Bush, we could finance our national debt at 5% interest for only $200 Billion per year. Not cheap, but bearable. That number is now $1 Trillion. That is not bearable. It is more than Social Security, more than Medicare and more than the Defense Department. It means less government spending and more taxes. Smaller government accompanied by greater cost of government. All those free giveaways….now the bill will come due.
Why not simply inflate our way out of it? Because we already did that, and now the economy cannot handle more inflation.
Government has reached the ultimate point. It is too powerful, too incompetent, has far too many entirely dependent on it, and it lies. It has co opted the press. The anger in the society which overwhelmed the Clinton campaign is only a beginning.
the fed holdings will be way underwater with rising rates, they’ll have to hold til maturity or take a bath, they’ll be dumping losses onto the treasury , these have been the salad years, it’s about time to start paying the piper
we probably will need a major, non nuclear war to solve these problems
Unfortunately it’s not just the US.
“Why not simply inflate our way out of it? Because we already did that, and now the economy cannot handle more inflation. ”
Why? Inflation has been negative or zero for almost a decade now.
Not a problem because the federal government always prints the money first to make the interest payment (kites the checks). Say interest payments go up by a $billion:
1. Treasury credits holders of bonds by 1 $billion. $1 billion enters the economy that didn’t exist before.
2. Government now has an extra $1 billion deficit.
3. Treasury issues $1 billion worth of bonds. Banks by bonds. $1 billion absorbed from economy.
4. No change to the real economy. Federal government has more “debt” that really doesn’t matter because the same process as 1 – 3 above will pay it.
What really matters is if the federal governments purchasing is actually driving the real economy, not the bond market. If unemployment is driven too low and wages go up too rapidly, significant inflation would be the result.
That, of course, would be good for workers and debt holders, but bad for banks and those left unemployed.
http://www.econlib.org/library/Enc1/art/fig06.jpg
From http://www.econlib.org/library/Enc1/GovernmentSpending.html
Still a way off many EU countries.
The key is this – while spending has grown consistently as a percentage of GPD, if you look at a graph of federal revenues as a percentages of GDP it is a flat line at 18%. Note that this has been true since the 60s. With high marginal rates in the 60s, and low marginal rates, and all the tax systems in between, the revenue has remained nearly constant, at 18%. If the government is spending 25%, that’s a problem.
Title to the graph is % gov. spending gnp.
Is that a bad thing?
@crsyangle — your chart is only looking at FEDERAL spending, and only looking at on-balance sheet spending.
To make a meaningful comparison with European states (who’s economies are failing):
— Add the cost of several “peace prize winning” wars. Off budget war spending adds another 3-4% (at least).
— Add the cost of off balance sheet spending (spending is not part of the budget). Welfare spending (social security, medicare, obamacare) adds at least another 7-8% (probably a lot more) … it would be considered accounting fraud if anyone else did this
— Add the cost of state and local government spending, which is generally included in most European national budgets. All the state and local spending in the US would be accounted for like a block grant from the Federal government, if you put numbers on equal footing. State and local spending adds another 10-12% of GDP to your graph.
The correct number for total US government spending as a percent of GDP is pretty close to 50% once you include those “extras” above.
Yes, I don’t question that methodology is variable and would agree with your view, the point was the trend. Not sure if the list I posted below is usable as clear reference either, just compares by a certain metric. If you have a clearer reference by all means direct us to it.
Not to defend the mess left by Bush and Clinton (and the others before them), which was already pretty bad — but the aggregate numbers published under the Obama administration would be classified as accounting fraud if any entity other than the federal government published them.
Even with the Chicago-style accounting tactics, recognized debt levels still skyrocketed.
I was only pointing out that your comment “… still way off from EU countries…” was deceptive, since the EU spending levels include state / local spending, while the “US” numbers in that chart do not. Both the US and EU have lots of “off balance sheet” debts and “off budget” spending that make the true spending/GDP percentages much higher.
Like alcoholics lying to themselves that they have “only had a couple drinks. I have it under control”, the big government “keynesians” are lying to themselves as much as they are lying to the rest of us.
They have a very big problem, and if you think you know all the crazy places they have hidden bottles of hooch…. you do not.
What’s the problem? As I showed above, the federal government can have essentially infinite debts with no real impact on the economy. Because in reality, its not “debt” in the sense you or I have debt. There is no concern of asset forfeiture, and the government never has to sacrifice to make payment. Nor does it need to increase taxes (obviously sense we’ve been running massive deficits since Reagan, and tax rates have steadily declined).
Yet, each crisis gets worse than the one before… Monetizing debt is just a fancy name for helicopter money. Central banks out of dry powder – next stop IMF and BIS call for Special drawing rights to bail out the ‘lender of last resort’.
BTW — I don’t know where all the hidden bottles of hooch / accounting fraud is either… didn’t mean to imply otherwise. Just saying we all need to understand that G7 governments are lying to themselves as much as they lie to citizens
Agree. You would think that legislative/regulatory changes that direct the private economy should count in some way as government spending, especially if they are designed to profit associates, but how to ever measure that. Sometimes I wonder if we are just paying people to rob us.
Funny thing is there is no very clear order. Developing nations have lower %, but above that it is mostly a mixture. Japan is only just above USA for example, in spite of its debt/monetary dynamics :
http://www.economywatch.com/economic-statistics/economic-indicators/General_Government_Total_Expenditure_Percentage_GDP/
You believe Weimar 1923 and Zwimbawae 2012 were good exercises in fiat money printing ?
Of course not. And of course, unlike the United States, they printed and distributed to the population. With the corresponding results.
Maybe, but consider the reality of managing an economy that for whatever reason has stalled, where public payment obligations to the general public are either created or must be met, where not to do so will lead to civil strife but to do so will lead to further distortion and increasing inflation.
The debt is out there now, it has been created over decades and its inflation has been partly offset by productivity gains. Any current debt deflation does not remove the bulk of existing debt ( both private and public), and though the slowing of new credit is deflationary, the obligations that are balanced right through society are pinned on the existing debt being serviced. At what point public compensation of that servicing tips into high inflation depends on the state of the underlying real economy, public psychology, social mood and more.
So I don’t think you can just say handing out cash, as in essence the public sector and benefits might just be doing that already, and to an increasing degree.
It does not look like the US will go full Zimbabwe for now, but on the other hand some kind of new order may ‘have to be’ centrally imposed instead where losses are accounted for and distributed. Neither seems too appetising, and a social breakdown in the case of the latter would lead into the unknown.
Of course the federal government will always service its debt and meet all of its obligations to the citizenry without effort. Again, the only problem is if government purchases in the real economy cause wages and therefore inflation to increase too fast. And of course, that will lead to increasing revenues that will reduce the deficit.
Government so called debt is not a problem in the USA. Private debt is the killer.
The two are much more intertwined than appears, for now government debt as stands and independent of all else, is not, in purely accounting terms, the problem…that is if you agree to having public debt at all and fiat currency . I agree with the ‘so called’ label, but how else are you going to term the extractive process of taxation that accompanies ? The idea that tax is just recuperative of government contribution depends on if you value government as a contribution. If they purely printed it would be labelled ‘government imposition/graft’ on existing currency and savings, or similar, no ?
Sounds like a great perpetual machine. There are consequences (but maybe not to bankers)
https://www.bondvigilantes.com/blog/2010/02/02/what-happened-the-last-time-the-uk-defaulted/
Interest expense – better number to look at net interest expense. Per CBO around $250 billion for FY2016 …
“Net Interest. Outlays in this category consist of the government’s interest payments on
debt held by the public minus interest income the government receives. In 2016, such
outlays will rise to $248 billion, from $223 billion last year, ”
https://www.cbo.gov/sites/default/files/114th-congress-2015-2016/reports/51908-2016outlookupdateonecol-2.pdf
Debt held by public around $14 trillion … the $20 trillion bandied about includes fedgov trust funds (social security and medicare the biggies).
Also, remember Federal Reserve remits “profits” back to US Treasury on securities held (included in public total) … lately that number around $100 billion / year.
the debt not held by public is the soc sec and medicare debt–that could be easily cancelled-the problem would then be the UNFUNDED would have to go up by the amount cancelled.
What we have is a true pay as we go system for the so called entitlements which a lot of us paid into for 35-45 years–to see people enter the system for 10 or 15 years and get he same benefits.
The issue is whether we have that 5 trillion debt or not, we have to deficit spend to pay the bills and debt has a run rate increase of nearly 2 trillion., nobody talking about that. Actually it an investment in mortgages and student loans and perhaps other things.
OK just what we need, loan more money for kids to go to school who will not pay off their loans but meanwhile gdp goes up because of the debt spending.
Same for housing mortgage–3% down thru Fannie Freddie and if house prices decline we know who pays for that.
btw–why the hell is the govt in the mortgage business anyway? We are we encouraging people to go to college when perhaps they should not. If its their own money, and they have some skin in the game–maybe they think twice about incurring debt going to college.
so I will finish this comment by asking how we pay off our obligations from soc sec medicare , prescription drugs, et al and debt, without “print and inflate”? Buehler, anybody?
We need a “Murray the accountant” in DC.
“The issue is whether we have that 5 trillion debt or not, we have to deficit spend to pay the bills”
Exactly, Al Gore (for once) was right when he said the social security trust funds were filled with IOUs. If you go to US treasury you’ll find these assets are listed as NON MARKETABLE SECURITIES. The trust funds can’t sell in the open market to meet obligations. The moment FICA revenue doesn’t cover expenses Congress will have to authorize the Treasury to issue debt to cover shortfall … or pass legislation curtailing benefits.
“why the hell is the govt in the mortgage business anyway”
The same as every other government “business”: to steal money and grab power.
Jubilee.
aka DEFAULT
Currency debasement.
Also require all retirement accounts/pensions to invest 40% of their portfolios in the new US guaranteed return bonds…
Mountains of virtual debt that can’t ever be paid with real money/earnings.
The tragedy begins when they have to try…
I think I’ll buy more land and gold. They stopped making them quite a long time ago.
Enjoy paying your new annual “land tax” and “gold tax”.
Has anyone ever figured out why the national debt (at least some years) goes up so much more than the budget deficit.
Sent from my iPad
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Yes – I did a report on it recently, explained in depth
https://mishtalk.com/2016/10/17/us-deficit-up-590-billion-but-debt-up-1-2-trillion-sleight-of-hand-magic/
US Treasury debt levels increase more than deficits for the same reason it happened at Enron: off-balance sheet accounting fraud.
Most welfare spending (social security, medicare, obamacare, food stamps/cards) is treated under fraudulent federal government accounting as “off budget”. As though it doesn’t count (it is the biggest spending item).
While “regular” defense spending is on budget, all the “temporary” war spending is fraudulently treated as “emergency, off budget” spending.
Massive amounts of “promises” are accounted for as “off balance sheet debt”. Its like a consumer claiming that credit card debt counts, but store credit does not count — even though you have to pay both.
Maybe you want to say the federal government is addicted to spending, and lying to itself like an alchoholic lies about their drinking. Maybe you just want to call it accounting fraud.
But if you are a US citizen, or an illegal immigrant hoping become a citizen, you are going to have to come to terms with the hundreds of trillions in unpayable promises the US government has made.
What’s interesting is that the budget seems to be essentially in balance excluding interest payments on the debt. Trump is a master negotiator.
What can possibly go wrong?
It’s fun getting to cook up the next great government schemes:
When foreigners stop buying US debt, the king’s subjects will be forced to buy them.
In the next 4 years there will be some phony social security/retirement “fix” which is nothing more than converting FICA to a purchase of treasuries. It wouldn’t surprise me if Obamacare was replaced with a similar “health savings account” scheme. Boomers will make out OK, millennials will get royally screwed. And I fully expect 401k legislation to require X% of treasury purchases. While we’re at it, expect the $100 and $50 Federal Reserve Notes to become illegal, but you’ll be able to convert them to Treasuries in an electronic account
You’re gonna LOVE the new version of “End The Fed”!
The question “What can possibly go wrong?” from a free market person like Mish sounds like “How can I use this to consolidate power?” to the average bureaucrat.
To coin a phrase, the government isn’t there to create disorder, it’s there to preserve it.
The fraction of debt held by the bank needn’t be worried about. The bank returns interest to treasury anyway. So what if treasury sends an extra 1/4% to the bank, if the bank just sends it right back anyway? Interest paid to the Social Security trust fund doesn’t really go anywhere. Its just recycled into new treasuries.
Only the fraction of debt held by the public has actual interest being sent to a third party. That’s the only part of the equation that changes.
Better interest is helping defined benefit pension plans and 401k balances, across the nation, which is a net plus.
That accounting trick (pretending social security, medicare, obamacare) is off budget spending and “doesn’t count” is considered pure accounting fraud when anyone in the world besides the federal government does it.
The scam only works if you plan to default on social security / old age welfare payments in the future. Stealing from the future is still stealing
Doncha think it’s kinda funny that Ryan-McConnel and his gang of republicrats had no problem pissing away huge amounts of money to obama for whatever he wanted in October 2015 (OSB) to cover spending all the way to 45 days after obama’s “presidency”, then had to add to it twice, no questions asked, and all of a sudden, the Congress chameleons into the “Guardians of Fiscal Responsibility” as soon as Trump wins. Ride’m Ryan and Cocaine Mitch are going to save the Republic… you just wait and see, lol.
A ticking economic time bomb. Thinking Americans have known this for years.
This is why Trump needs to get out in front of this and educate the American people – like Ross Perot would have done. Get out the chalk and the chalkboard and reserve a 1.5 hour prime time special address segment on all media networks to make the people understand why desperate problems require timely and resolute actions.
Honestly, I don’t think it’s salvageable. I believe we’ve gone beyond the point of no return. But that is no reason to surrender and throw up the white flag We must persevere and do what we can to reverse the damage.
God speed, Mr. Trump.
He was here in Wisconsin last night on his Thank-you Tour. When Paul Ryan appeared onstage a chorus of “boos!” rained down on the entire (invitation only) event. Mind you, this is people who don’t necessarily vote Republican, but they backed The Donald.
Myself, I live in Jim “Patriot Act” Sensenbrenner’s district. The guy is so damn conservative he makes Pat Buchanan look like 60’s hippy radical Abbie Hoffman. Priebus lives somewhere around here, too. He’s careful now about appearing with Ryan, although I know those two deer hunt together on the same land.
V.A.T. Value Added Tax.
Hit consumption.
Fuel, Clothing etc. Start at 10% and wind up to 20%.
Financial Transaction Taxes – EU like the idea of that one.
etc etc
KInd of makes you wonder if it is proven that government spending reducies economic activity, whether the same proof applies to QE, ZIRP and NIRP
This would require a pretty huge proof. Say the Federal gov’t spends money to build an aircraft carrier. That requires a lot of economic activity, contractors place orders for raw materials, workers of all types are hired, all types of contracts get signed with lawyers reviewing them etc.
Now in order to claim that this reduces economic activity you have to show that all the above is offset exactly but some other activity that is cut back. Someone decides to cancel their Netflix because the gov’t is out there spending all that money on the new aircraft carrier. Someone else decides to skip the new car they were going to buy this year, another company decides not to expand etc. etc.
The question that comes to my mind is how exactly does everyone follow gov’t spending so carefully and how do they know to reduce their economic activity just enough to offset the aircraft carrier? In real life it isn’t like you just buy an aircraft carrier. Contracts are signed years in advance with deposits and milestone payments made along the way. Then there’s cash accounting versus accrual accounting. If firm A gets a $5M deposit to draw up the designs of the carrier, but then drops out because they don’t have the expertise they have to give back the $5M. Cash accounting would say that’s $5M spending when the check goes out and $5M negative spending when it comes back in while accrual says there’s no spending actually done until the firm earns the $5M by doing the work.
Most people are not gov’t budget wonks and even if you were a lot of these minute transactions are hidden from the public. Even if they weren’t how do people know how much activity to reduce? Should I cut back on buying a car or just lowering my Netflix? I’d have to know how much everyone else is cutting back.
This only makes sense if you have one special condition; a fully employed economy. There you don’t have a knowledge problem to contend with. When the gov’t orders a design for $5M, the firm has to pull people off of other design projects because they are at capacity. The aircraft carrier is in that case offset by other goods and services that aren’t produced.
I don’t think many of you are “assimilating” the information correctly.
Let me help.
“If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up HOMELESS on the continent their Fathers conquered…. I believe that banking institutions are more dangerous to our liberties than standing armies…. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.”
Thomas Jefferson
I know, most of you can’t get your mind around what the man wrote. Just give it a little more time, and I promise you, it will ALL become CRYSTAL CLEAR.
And just how does another “fake quote” on the internet help us?
The chart shows an ending diagonal Elliott Wave pattern that is nearly complete. I expect interest on the national debt to go DOWN. This may happen by cancelling debt (partial default), or by paying off the debt more aggressively through a combination of budget cuts / higher taxes. Monetization might also reduce the national debt, but it would also destabilize global finances that use the dollar as a reserve currency. Budget cuts would be the way to go, but perception is Trump will get some of the debt cancelled.
What can possibly go wrong? In a command economy anything is possible. Bond vigilantes seem to be dead in the water and demographics don’t seem to have the usual affect in our upside down world.
Here is an interesting take
https://www.bondvigilantes.com/blog/panoramic-outlook/breakdown-demographic-bond-valuation-models/
Is the Fed is fighting the tape?
should be as a % of GDP..
The fundamental problem most people here are making is they make ‘threshold’ orientated statements without providing any clue as to what mechanisms trigger the threshold.
For example, saying something like “going over $200B a year in interest payments will finally blow up the system”, or “if debt rises above 100% of GDP we implode” or simply “more than $1T in new debt is intolerable” make no sense without a mechanism.
Mechanisms work by different means. Setting a room at 69 degrees is comfortable, but 80 degrees is uncomfortable. Between 70 and 80 there’s a linear approach….74 degrees is a tad less conformable than 73. Other mechanisms work by trigger points. Water boils at 212 degrees, not before it.
Not a peep from the senate on debt or spending caps when Obama was president. Now the senate will use it to curb trump if they can.
the rate hike terms in RRPO are 30B a day, limit. if you consider a 1/3 of the former QE monthly spending a limit. once before Greenspan hiked rates and opened the discount window, although in RRPO the window opens and a guy grabs you by the lapel. I consider this rate hike accommodative, Of course AG also used a gradual rate hike policy and followed only CORE inflation, and this Fed does neither.