There are some interesting GAO slides available on the wiki page per the debt.
The wiki is reasonably well written (at least at the moment). There are several very interesting GAO slides. I found this one particularly interesting. Partly for what is NOT said about it, but clear in the graph.
First off, there is a small blip in revenues to above 20% in 2000 during the peak of the last bubble. At most, you can get a temporary 2% above about the 18% of GDP as Federal Revenue, and even then only for a little while, and followed by a drop. Note, too, that the GAO realizes that Federal “tax take” is only going to be 18% of GDP going forward.
Next, notice the white boxes. That’s all the government expenditures outside of Medicare, Medicaid, Interest, and Social Security payments. Every last scrap of it. Military. Agencies. You name it. Notice that it WAS a large percentage (about 15% of GDP at the start) but ends up 8% going forward. Since the U.S. Government has never shrunk, for it to be a smaller percentage of GDP implies a large growth of GDP. Yet we’re not seeing that (and, IMHO, will not for quite a while. You do not get a lot of ‘growth’ out of a retiring welfare state…) So, IMHO, there are some “rosy” projections of GDP growth hiding under this graph somewhere. Assumptions that do not recognize the Demographic Bomb impact on productivity as we have ever fewer workers and ever more retired folks. Clearly it does recognize the growth of retired folks in the entitlement bars.
Now look at about 2020. Look how much above the revenue line is the top of the white box. That difference is the size of the deficit that must be borrowed from someone. Scan right and look how rapidly that top of the bar runs away from the revenue line. That is in %GDP, so in absolute dollars it will be much much worse, and if GDP doesn’t grow as expected, even more drastically away from dollar revenues. By 2060 the “deficit” is 25% (more or less) of GDP per year. Does anyone really think that we can borrow 25% of GDP every year, for decades?
OK, drop down and look at the Social Security bar on the bottom, the green one. Between 2010 and 2030 it creeps up a tiny bit. That entire move is the retirement of the Baby Boomers. That’s it. The whole “demographic bomb” is reduced to that couple of percent of GDP “bump”. That is a fairly large risk to Social Security and the entire “risk” to the Social Security System that folks are all worried about.
So what makes up the REST of the giant rise? What turns this “Social Security Crisis” into an unimaginable collapse issue?
Medical expenditures and interest on debt.
Medical care cost are highest in old age. Often the bulk of all lifetime consumption of medical care comes in the last half dozen years of life. That is why, as the “Boomers” age, the costs of Medicare climb. It is also part of why Medicaid climbs, but that also is climbing based on covering more people for more things. Taken together, they are the the costs of “socialized medicine” at the Federal Level. (Not yet in the graph are any costs from Obamacare and any other medical or drug plans added after the 2007 date of preparation of the graph. So things are really worse than the graph shows.) I make it about 15% of GDP just on Federal entitlement medical costs. At the far right, those medical costs and Social Security costs make up 18%+ of GDP. That’s just not going to happen. Those are acts of consumption, not production. You can not have nearly 1/5 of your economy as dead weight consumption, mandated, and have any kind of economic growth.
Now, look at the interest rate bars. Realize those are from BEFORE the rampant exponential growth of debt we’ve seen under Obama. Between the exponential rise, and the inevitable bump in interest rates to come, those bars are too small. Even with that, the graph points out that in about 2035 ALL of government revenues are consumed by Medical, Social Security, and interest payments. Entitlements and mandatory interest charges. About 22 years. IMHO, it’s going to be much sooner. As soon as interest rates start to rise, I think we’ve got about 5 years. Call it 2025 at best.
Realize, too, that there is nothing The Fed can do to “fix” this. If they buy all the bonds, keeping rates from exploding, the currency will enter a hyperinflation. If they do NOT buy the bonds, rates explode (due to the high level of debts being financed) and the deficit blows out very fast. As evidenced by Greece, the Rest Of World will not be stepping up to loan a lot of money to a Government Entitlement Economy, even with high interest rates.
The Democrats propose to raise tax RATES, to get the revenue line to rise above 18%. Yet we know that can not happen. We are already past the peak of the Laffer Curve, so any increase in rates will result in less revenue, not more.
The Republicans want to cut rates to “stimulate the economy”. Yet this graph already must have GDP growth built into it, as the size of the “rest of government” bar shrinks or stays constant, despite real budget growth in actual dollars as far as the eye can see. You can ‘stimulate’ and ‘grow’ all you want, the revenues will NOT rise to 50% of GDP, or even 25%.
The only possible way out of this is to shrink spending. That must happen either to ALL of the rest of the Federal Government (and drastically); though even then it is not enough in 2030… Or it must happen to Medicare and Medicaid fairly aggressively, AND the growth of the debt must be turned into a decline of debt. (By 2060, the debt service alone even with the estimates on this graph, pre-Obama $Trillions, consume all of the 18% of GDP that can actually be taken via tax receipts).
In essence, the only things that can possibly do anything to avoid this “SPLAT!”, is to eliminate the Federal Debt AND cut Federal Medical Entitlements. Anything else can, at most, delay the “SPLAT!” by a couple of years; and most likely can’t even do that, as it will be too small and the bond buyers will realize this state of affairs, causing yields to rise and debt service to rise, rather a lot, as soon as that is clear. Call it about the middle of the next Presidential term. Either we have Obama Part Deux and it’s clearly depression / hyperinflation land; or it’s Romney “trying but too little too late” and with congress not cutting a thing on spending.
Does anyone really think the Federal Reserve can eliminate $16 Trillion on debt in the next 20 years? Remember that many bonds issued today are 30 year bonds. That debt is hard fixed until 2042. There are a load of 10 year bonds, so 2022, that will expire, and refunding will likely be at much higher rates, so problematic. In any case, look at the point about 2025 on the graph. Right between the 2020 and 2030 bars. That level of debt, interest charges, and expenditures are essentially frozen already ( though, as noted, likely higher than this 2007 projection due to ObamaCare and the $5 Trillion more debt…)
So there you have it. On one simple graph. The Demographic Bomb meets the Welfare State and Socialized Medicine, and the whole thing blows up. No doubt about it. IMHO, first sparks and Aw Shits hitting about 2016 to 2025. No matter what The Fed or Congress do (given that Congress will not cut spending or repeal handouts).
We also have a large ‘retirement’ commitment to government employees (and worse at the State and Local levels) that can not be met, and we have all the “off budget” things that do not show up here, such as military adventures and wars all over the globe. Those will accelerate this problem, IMHO.
Another Interesting Graph
Who gets stuck with bonds that can not be repaid? Who is giving us money now (and expected to fund that future debt growth)?
Particularly interesting here is that big bottom blue block. INTRA-government and Federal Reserve. Basically, we owe a lot of the debt from one part of the government to other parts, or to The Fed. As The Fed is a quasi government creation, we could always just “nationalize The Fed” and erase that part of the debt. Some chunk of that bar is also going to be various ‘retirement funds’ for Federal Employees. We can just repudiate those retirement payments, if needed. (That does NOT include the present ‘unfunded’ pension obligations racking up at large speed, so it will be even worse by the time the SHTF moment comes.) Other parts will be various “agencies” with spare cash to park (like Federal Highway Funds or construction projects).
One big thing to realize, though, is that that bar can not grow much more. As the “boomers” retire, there will be less money flowing into those Federal Retirement holdings, and more flowing out. It is not a source of new money. Same thing for the State and Local bar further up an even the private pensions. The Boomers are going to be taking out, not putting in, very soon.
The “best news” is just how small are the “other investors” and insurance companies and “Savings Bonds” slices. That “Foreign and International” slice is largely Japan and China, at over $1 Trillion or so each. They were growing their holdings through the 2008 date of this chart, but some recent evidence has China and Japan reducing exposure. OK, we can “screw them over” if needed, by either of direct default or more likely inflation. But it is also pretty clear that they can not be expected to double their holdings every year to fund the growth of our deficit spend and the withdrawals for retirements that happen “soon”.
At this point it’s pretty clear there is exactly ONE “buyer of last resort” for the massive debt growth happening now, and more to come from the projection above. The Fed.
And what did The Fed just announce? Nearly unlimited bond buying for the foreseeable future.
The Stock Market took this as “good news” and shot up 200+ points on the Dow.
While that’s the classical interpretation, I think we’ve got to look a step beyond.
The Fed can NOT sterilize all that bond buying. They do not have enough other currency assets to do it. $Trillion / year added is going to show up as inflation or stagflation. During times of inflation, the stock market does not rise fast enough. What wins are “stuff” investments. Metals (gold, silver, platinum), oil wells (modulo short term drops on business slow downs), real estate, collectables. My “story” would expect “stuff” to rise in price.
FWIW, I’m not seeing a whole lot of currencies in which to sink money (out of dollars). The Euro “has issues”, and THEIR Central Bank going on a Bond Buying Binge does not give me warm fuzzy feelings (for the same reason as The Fed doing it…) Japan? They expect to cash in and retire. As that’s not going to increase productivity, I’m not seeing the attraction. They are in even more debt than just about everyone else, too. 225% of GDP and #1 position per this link (h/t Adolfo):
Essentially, we’re left with the “3rd World” and Russia, plus Australia and New Zealand. While there are some interesting small plays in there, they are not enough to carry the world, and in a major economic “aw shit” those currencies usually do not do very well.
So we’re back at “stuff”.
An interesting map of the world showing debt by country is here:
It basically looks like the folks who could borrow, loaded up; and those who could not, were not historically good places to put your money. Not a lot of space between those two.
For folks interested in more detail on who holds what debt, this graph is nice:
Again, it is a 2008 graph, so things are a bit different now. Still, it is useful.
First off, notice that the public holdings are not a lot of long term bonds. Nearly $3 Trillion or notes. 10 years and under. So on average, about 5 years for 1/2 of them to “roll over”… be refunded or redeemed. Anyone else think there is no chance in hell that we will ‘buy back’ $1.5 Trillion in Notes in the next 5 years? Another roughly $2 Trillion are “bills”. Less than a year maturity. So we MUST roll over $2 Trillion every year AND borrow $1 Trillion more AND refund any longer notes and bonds that mature…
On the Government holdings side, we again see that most of it is various retirement and social security funds. (Old age and survivors). Given that we go from net excess in, to net outflows, in the next few years, those are not going to grow. However, it does point up how the “Social Benefits” and entitlements are the things that put the budget in peril, and the things that must be repudiated in a generalized “failure to deliver”.
That part of the graph, matched to the Boomers retiring, also points up the expectation that about $2 Trillion more will be needed to redeem those bonds over the next decade or so, to make the payments to those retired Boomers. So where on the right hand side will THAT $2 Trillion come from, eh? From Japan who will be cashing out to pay retirements too? From China? IMHO, nope.
It can only come from The Fed. As inflationary dollars. This has the dual effect of officially making the payments, but also causing inflation to erode away all the real debt on the books too.
So is there NO hope?
Only a tiny bit. There are folks who will point out that at the end of W.W.II we had debt at 100% of GDP, nearly double now; and we got it back down. That is encouraging.
What it ignores, though, is that we essentially had the entire global stock of intact manufacturing plant, a LARGE young workforce returning from war (and a lot of women newly trained to work in industry too). A spectacular thriving economy, and a young and growing workforce. Oh, and we did NOT have a huge entitlement burden to pay out…
Other than that, no problem! ;-)
Frankly, IMHO, the only “hope” is not very much. IFF we got a Romney With Spine (as opposed to the Massachusetts Romney) along with a full sweep of congress as Libertarians and Republicans, along with a population aware of the issues and willing to bite the bullet and take the hits; we could dump a load of entitlements, get economic growth back on track with a rabid reduction of agencies, regulations, taxes, etc., and exit from a few “wars” around the globe (including the money wasting “war on drugs”). Repeal ObamaCare AND the Baby Bush drug plan (that we also can not fund), and a few dozen other such things. Oh, and do a complete pruning of the Government Pension System. “Hey Hey, Ho Ho, Unfunded Pensions Have To Go!”… we can’t pay them anyway, so they are, in essence, just a big fat lie anyway.
If we did all that, there is a small hope we can avoid a complete budget meltdown and destruction of the currency.
No, I don’t think there is any chance at all it will happen.
I suppose there’s a small chance that the above charts are wrong. That something dramatic will happen (like Russia nuking the Muslim World and China and EU being dragged into the local war, leaving us being the only major economy left standing). But in a more or less “business as usual” scenario, I just don’t see any way this can work. Even tossing in a War isn’t going to fix it. Making more bombs and guns and sending them off to the other side of the planet to be destroyed is NOT going to redeem the bonds, nor provide more doctors to retired folks on Medicare. It will not produce any net value to cover those debts, just destroy real value. We are already on a ‘war footing’ in terms of economic activity anyway. We make more armament than just about anyone else on the planet. The only way I can see that being a ‘feature’ is if we find a way to sell more of it to China, Russia, Muslims, etc. for them to use killing each other. At least then we can get them to send us some real money…
Frankly, I’d like to have a nice positive “spin” to end this note. Some ray of hope. Some creative “way out”. But sometimes “Reality just is. -E.M.Smith”. And have I mentioned lately that Economics is called “The Dismal Science” for a reason?
So I’m just going to leave it hanging here. If anyone can see a way out of this Demographic Bomb meets Debt Bomb problem, by all means, say so. Even a whacky idea is better than what we’ve got now…