Debt crisis is a myth.....?

[touhy]

I'd be curious to hear your thoughts....He almost makes me feel better...at least as long as interest rates remain low.

http://www.minyanville.com/businessm.../2010/id/26985

From the article:

(For the United States)interest payments (not total debt service, which includes payment of principal) as a percent of GDP are equivalent to about 1.4% of GDP. Let me repeat: US government interest payments are only equivalent to roughly 1.4% of national income.

Furthermore, if we factor in long-term inflation of about 2.5%, the US is essentially paying a real interest rate of about 1.00% on its debt. This translates into a real interest burden of about 0.4% of real GDP. This is almost an insignificant figure.

[ggirod]

Re: Debt crisis is a myth.....?

I'd be curious to hear your thoughts....He almost makes me feel better...at least as long as interest rates remain low.

He is just celebrating the fact that the treasury got another bunch of Balance Transfer Checks in the mail. They can float the credit card balance for another 9-12 months at only 1% interest!!! Let's listen in to the happy couple ...

Hi Honey! How's work going? I just went to the mailbox and we got a real good deal on a balance transfer. We can clear out that nasty credit card bill and only pay 1%! Remember the big screen TV we were looking at? Well, you were there too... Anyway we could get that and STILL have a BUNCH of credit limit left over! Just the thing for you to watch the figure skating on. Oh, the skating is already over? Well, then next year... Anyway, whadaya think? Ya know since I lost my job it's awful dull around here with just that 25 incher in the rec room. Oh, sure. Yeah, I'll start vacuuming every day if I get to rest those tired feet afterwards. Why should we worry. 1% interest is so cheap it's almost sinful. They're GIVING THE MONEY AWAY!! We better hurry.

Nuff said?

[gnk]

Re: Debt crisis is a myth.....?

(For the United States)interest payments (not total debt service, which includes payment of principal) as a percent of GDP are equivalent to about 1.4% of GDP. Let me repeat: US government interest payments are only equivalent to roughly 1.4% of national income.

This has to be the most idiotic thing I have seen all week. That writer is clueless.

Does GDP pay the interest payments or does tax revenue?

Interest payments as a percentage of tax revenue is what's important. And you know what? The tax revenue is dropping, yet the interest payment is increasing. And we are expecting trillion plus deficits for this decade. Not good.

(By the way, I couldn't open the link)

[flintlock]

Re: Debt crisis is a myth.....?

...at least as long as interest rates remain low.

That's what all those variable rate mortgage holders were saying a few years ago too. It's almost like free money, whoopee!:rolleyes:

[touhy]

Re: Debt crisis is a myth.....?

(By the way, I couldn't open the link)[/quote]



Sorry, the link went silent....maybe the author slinked away in shame....

[ThePythonicCow]

Re: Debt crisis is a myth.....?

I'd be curious to hear your thoughts....He almost makes me feel better...at least as long as interest rates remain low.

http://www.minyanville.com/businessm...als&from=yahoo

The link you posted was mangled - never could have worked.

From the snippets you quoted from the article I was able to search around and found what seems to be the article at: Just How Large Is America's Public Debt?

[Raz]

Re: Debt crisis is a myth.....?

I almost posted this article Thursday morning.

Kostohryz called the stock market bottom of March 6th, 2009, and said that the S&P 500 would likely trade above 1,000. Excellent.
He also recommended establishing Short positions in Gold on August 11th, 2009, when the Sep'10 Futures closed at 950.60.
Idiotic - by September 2nd he was $30/ounce for each contract in the hole ($3,000), by Mid-October he was $120/ounce in the hole, and if he held on to his convictions he would have been over $27,000/contract in the hole by early December.
(A not-so-merry Christmas.)

He obviously cannot read charts, knows nothing about seasonals for the gold market, and doesn't understand that it's not an investment like stocks or bonds or other commodities: it's a currency.
He's written a few good articles so I was completely taken aback by this one, and I'm glad touhy posted it since I wanted other opinions as well as my own: I think he's wrong.

[aaron]

Re: Debt crisis is a myth.....?

The article made me feel uneasy. It was very convincing to us mere mortals. (I AM the average Joe).

I agree that US government could potentially keep running these deficits for years. Japan has showed us that this is possible.


The Fed can prevent deflation. They have showed this already. We may get a final round of deflationary pressure in order to give the Fed the political capital to get the job done. Personally, I would rather have the government spend a trillion on a decent health care system in order to prevent deflation. It is just not fair to give more money to banksters. It is fair to deficit spend and have the fed monetize the debt. Fair in this case means we all get screwed.

[Raz]

Re: Debt crisis is a myth.....?

The article made me feel uneasy. It was very convincing to us mere mortals. (I AM the average Joe).

I agree that US government could potentially keep running these deficits for years. Japan has showed us that this is possible...

It also made me feel uneasy knowing he's made at least one outstanding call. (I am BELOW average).

The US government can only run these deficits for years in the future if foreigners
and/or their central banksters buy the bonds; the Japanese had savings - we don't.

If they don't buy our bonds and the Fed keeps on couterfeiting Bonars to purchase them, the US Dollar will collapse.

[aaron]

Re: Debt crisis is a myth.....?

[COLOR=navy]

If they don't buy our bonds and the Fed keeps on couterfeiting Bonars to purchase them, the US Dollar will collapse.

While I agree with you, my buddy will say they printed 2 trillion dollars last year, yet our dollar is stronger. He'll say Bernanke has done a good job and saved the world's economy from the brink of disaster, without inflation. Again, this is difficult to argue.

Sure, we can say 1.5 trillion dollars is sure to lead to inflation. But, apparently there is an even larger hole in the banks' balance sheets. Does that cancel out the money-printing?

[gnk]

Re: Debt crisis is a myth.....?

While I agree with you, my buddy will say they printed 2 trillion dollars last year, yet our dollar is stronger. He'll say Bernanke has done a good job and saved the world's economy from the brink of disaster, without inflation. Again, this is difficult to argue.

Sure, we can say 1.5 trillion dollars is sure to lead to inflation. But, apparently there is an even larger hole in the banks' balance sheets. Does that cancel out the money-printing?

How much of that printed 1.5 trillion was later used to purchase Treasuries?

And how will we continue paying the rising debt service on those treasuries that will continue being created and sold? Credit growth, public and private, has outpaced economic growth. The divergence is growing wider between the two.

Money printing will beget more money printing to avoid immediate collapse. That cycle is accelerating.

[Raz]

Re: Debt crisis is a myth.....?

While I agree with you, my buddy will say they printed 2 trillion dollars last year, yet our dollar is stronger. He'll say Bernanke has done a good job and saved the world's economy from the brink of disaster, without inflation. Again, this is difficult to argue.

Sure, we can say 1.5 trillion dollars is sure to lead to inflation. But, apparently there is an even larger hole in the banks' balance sheets. Does that cancel out the money-printing?

Ask your buddy to read this. Hussman is very smart and has been
correct for at least the past three or four years - and he's never been a "gold bug".


January 19, 2010
Inflation Myth and Reality
John P. Hussman, Ph.D.
All rights reserved and actively enforced.
Reprint Policy

The past two years have seen an enormous issuance of new government liabilities. During the two years ended September 30, 2009, the amount of U.S Treasury debt held by the public (outside of agencies such as the Social Security Administration and the Federal Reserve) surged by more than 50%, from $5.05 trillion to $7.55 trillion. During that time, the Fed's holdings of U.S. Treasuries actually shrank by about $10 billion, yet the Fed has explosively increased U.S. monetary base from $850 billion to $2.02 trillion, fueled by massive purchases of Fannie Mae and Freddie Mac's mortgage-backed securities. On Christmas eve, the Treasury quietly announced that it would be providing unlimited bailout funding for Fannie and Freddie over the next three years, since the underlying cash flows received by Fannie and Freddie on these mortgages are not sufficient to keep the agencies solvent.

In total, the quantity of U.S. government liabilities forced into the hands of the public has soared by $3.62 trillion - an increase of 61% since the third quarter of 2007. Keep this figure in mind as various pittances are reported to be returned from TARP funds provided to various financial institutions. Likewise, remember that any interest "earned" by the Federal Reserve on the assets it holds is interest that is either implicitly or explicitly paid by the Treasury, and is returned thereto. Of course, this figure will get progressively larger as government revenues fall substantially short of outlays, and can be expected to do so for years to come.

It is in this context that we should consider inflation risks over the coming decade. At present, inflation risks are hardly considered to be problematic by Wall Street. From the standpoint of the next few years, my impression is that this complacency is probably well-founded, but only because we are likely to observe a second wave of credit losses that will create fresh "safe-haven" demand for default-free government liabilities. From a longer-term perspective, however, I believe that inflation will be a major event in the latter part of the coming decade, with the consumer price index roughly doubling over the next ten years. As exchange rates and commodity prices tend to be more forward-looking and less "sticky" than the prices of goods and services, it is likely that these markets will move substantially well before the eventual peak in CPI inflation.

I have not always held such concerns about inflation or commodities. A year-and-a-half ago, I argued that strong disinflationary pressures were likely to emerge, and I expressed a great deal of skepticism about the sustainability of the commodities surge, which had pushed the price of oil to $150 a barrel (see July 7, 2008 The Outlook for Inflation and the Likelihood of $60 Oil). At the time, the rush to commodities was not based on general inflation concerns, but instead on the view that demand from China and India would drive prices ever higher. Frankly, I'm still unconvinced that China will be capable of enjoying sustained economic growth without shooting itself in the foot as a result of its wholly undemocratic leadership and weakly-developed banking industry. It is not typical that free enterprise "growth miracles" thrive for long in economies in the constant grip of bureaucrats (witness Japan about 1988, and the awkward end of that growth miracle). ...

http://www.hussmanfunds.com/wmc/wmc100119.htm

[tsetsefly]

Re: Debt crisis is a myth.....?

This has to be the most idiotic thing I have seen all week. That writer is clueless.

Does GDP pay the interest payments or does tax revenue?

Interest payments as a percentage of tax revenue is what's important. And you know what? The tax revenue is dropping, yet the interest payment is increasing. And we are expecting trillion plus deficits for this decade. Not good.

(By the way, I couldn't open the link)

+1, interest payments already is the 3rd or 4th largest expense in the budget and it could be the largest by 2020...

GDP doesn't pay the bills...

[charliebrown]

Re: Debt crisis is a myth.....?

yes comparing interest / GDP is not valid.
Let's assume that treasury debt is 12T, and GNP is 12T. The author states that the interest paid is 1.4% of GDP. Ergo the interest rate is 1.4% since debt and GNP are about the same.

I don't know how the author arrived at this number, because the coupon on a lot of the treasury debt is more like 5%. So if the interest rate truly is 1.4% a tremendous amounts of the debt is held in very short duration instruments.

Just like ggirod stated, financing long term debts using short duration instruments is very risky. What if rates go to 5% like they did in Greece?
Now within a few months your interest expense has gone up, because the old 1% notes have to be "rolled". The extra money needed to roll over your short term notes, puts additional borrowing needs on your finances. which can lower your credit rating etc. etc. You can get a snowball effect.

Isn't this how the SIV's blew up. They were using short term instruments to pay interest on longer term debt. (Borrow for 90 days at 5%, buy 10 year mortgage backed securities paying 8%) Trouble is when the assets started tanking, the short term lender did not want to roll, asked for their cash back, or a much higher inerest rate (e.g. 9% 90 day borrow at 9 lend a 8), and then bam-o for the SIV.

Additionally compare GDP to your household income. How much % of your income are you willing to have consumed by interest.? Just like our household income that allows us to heat and eat, the lions's share of GDP is spent on generating things we need. 100% is not availble to pay interest.

It you have a 210K mortgage financed at 6%, with a 70K income, then this is only 18% of of your income, and this is about the level I start losing sleep at night over.

[Raz]

Re: Debt crisis is a myth.....?

Kostohryz wrote: "On this basis, interest payments (not total debt service, which includes payment of principal) as a percent of GDP are equivalent to about 1.4% of GDP. Let me repeat: US government interest payments are only equivalent to roughly 1.4% of national income".

Someone help me understand: Gross Domestic Product is the value of all domestically produced goods & services, is it not? (GNP - Gross National Product would include GDP + the value of US income receipts - the value of US income payments.)

Now when I ran businesses, gross did NOT equal net. GDP allows nothing for expenses, so how could GDP = National Income? :confused: