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Can the US government play with derivatives, or is it a bank only thing?
America fell off the fiscal cliff a long time ago
- Thread starter goldpelican
- Start date
Lovey80 said:
I'm not sure what this default comment is in relation to and I think I'm missing the purpose of your comment but I'll try to put some perspective around the US Government debt (for my benefit as well since I've never done this before).
According to the debt clock Federal Govt:
Revenue = $2.47 trillion
Current on budget debt = $16.45 trillion
Interest on debt = $0.2657 trillion
This implies a current average interest rate of just 1.61%. :O
From my understanding this low rate has largely been achieved because the Treasury had deliberately targetted near-term bonds yielding close to zero (thanks to Bernanke) rather than 10-30 year bonds. I don't know how much operation twist affected the average maturity date (but I think it is largely irrelevant).
Let's assume that the Federal Reserve actually starts to increase interest rates after 2015 and let's assume that by, say 2017, the short term rate is back to 4% with say the average bond profile of the US Govt portfolio at 5%. If the debt ceiling is not increased at all then the interest bill will jump to $0.8225 trillion. Is this sustainable?
The US Govt projection for nominal revenue in 2017 is approx $3.9 trillion. This implies 21% of the Government budget would be used purely to pay the interest bill. [However, the same source is actually assuming that the debt ceiling will be raised with debt continuing to accumulate to just over $21 trillion by 2017 implying a $1.05 trillion interest bill or 27% of revenues not including any repayment of principal. But we're being optimistic here
]
What level of political will is needed to achieve this? Given the current expenditure is $3.54 trillion (including interest, or $3.27 excl. interest), to not accumulate ANY new debt they'll need to cut spending by $1.07 trillion - or by 30%. If they do allow new debt to accumulate then they need to cut NOMINAL spending to $2.85 trillion (excluding interest repayments) - i.e. a nominal cut in annual expenditure by $0.42 trillion by 2017 - or by 12.8%.
So based on this default on the interest bill by the US Govt can technically be avoided but requires a significant amount of spending restraint.
BUT when people discuss the fact that US Govt default is essentially a certainty is in relation to the fact that they also have much larger amounts of unfunded liabilities (notably social security, medicare and medicaid). Laurence Kotlikoff has previously estimated the net present value of these unfunded liabilites to be $222 trillion. That means their true indebtedness is simply impossible to solve and they will default on something. Mostly it will be the "promises" made to the boomers but it will more than likely also include defaults/haircuts on bond holders.
Thanks. For my benefit as wellDogmatix said:
Unless the US Govt gets their budget into order quick smart then it is really only a matter of time until Lovey's prediction of the "exported inflation coming back faster than a tsunami hitting a Japanese nuclear plant" comes true. I currently don't see it panning out to the Zimbabwe/Weimar level but that really depends on how much longer than can is kicked and the deficits drag on and on. The scary thing at the moment is that the large central banks around the world are effectively outright monetising Govt debt and none of them have a pathway to surplus even though they are all predicting robust growth in revenues. Concepts like capital controls, financial repression and stagflation will be the catch words of the decade (combined with rapid escalation in oppressive laws making everybody criminals) unless we can get the governments turned toward increasing freedoms and decreasing intervention. They simply have to realise that their promises can't be kept and they need to step away from the reins of power and let people sort it out for themselves.
That makes much more sense now. Thanks for clearing that up.Lovey80 said: