Re: Our national debt just exceeded 22 trillion - effect of rising interest rate

[Cigarbutt]

I apologize. I realize now that I should have expanded on it.

 

So there is such a number that is called unfunded liability and I think from memory that 120 Trillion sounds about right. But the only useful thing about that number is that you can use it to write scary headlines. 120 trillion sounds very big. Then you add the word unfunded which sounds very scary. But the unfunded liabilities number is meaningless in itself. Here's why.

 

The unfunded liabilities counts the total future payments under a number of programs - though social security and medicare make up the bulk of it. The present value of the unfunded liability I think is around 50 Tn. But the real reason the number is meaningless is that it doesn't take into account the payroll tax the the US government collects to pay for these benefits. If we would shut down the US economy today, then yes you would have a 50 trillion liability. However the US economy will not shut down today. It employs millions of people and it will employ more people every year in the future. These people, as anyone who gets a paycheck knows, will pay lots and lots of trillions to offset that liability.

 

Looking at the unfunded liability is like looking at a the liability of a life insurance policy and ignoring the premiums. It's meaningless. What one should look at to get to any sort of meaning is a sort of funding gap: PV of unfunded liability - PV of future payroll taxes. But then the stories would become a lot more boring.

I would like to challenge you on that. :)

I work under the assumptions that 1-debt over GDP should stop growing at some point (and maybe that point has been reached?), 2-payroll taxes account for only about a third of revenues and 3-aging demographic pattern will cause a disproportionate increase in Medicare and other mandatory spending AND conclude that the fiscal gap has been and, absent major changes, will continue to grow larger and larger.

 

Where am I wrong?

 

This "unfunded" question is interesting. I've been looking into GE (I assume you are also) and have spent some time on their unfunded (assets-liabilities=a negative number) pension situation. Last time I looked, there was a 29B gap and some suggest that the gap is only theoretical and one should not worry if GE continues as a going concern and, in a way, that's fair. But why let such a gap build up? What if interest rates go down instead of up? What if markets fall (for real)? I would say GE will be interesting to follow and boring, it probably won't be, cashflow wise.

 

Isn't it easier to deal with a growing gap early on?

[Guest MarkS]

For some reason I've been morbidly interested in our national debt outlook.  Each year the CBO publishes an outlook and an even more interesting but less discussed alternative outlook for the future.  Below are recaps for each from the Committee for a Responsible Federal Budget.  If anyone else is interested in the subject, I strongly urge you to read these articles.

Outlook:

http://www.crfb.org/papers/cbos-2018-long-term-budget-outlook

Alternative Outlook:

http://www.crfb.org/papers/cbos-alternative-long-term-budget-scenarios

 

 

 

 

 

[cameronfen]

The problem is not to look at the total debt but the growth rate of debt. If debt grows slower than total gdp growth (ie with inflation added), basic math like in a dcf will imply debt to gdp will stabilize at some value.  With the new tax cut we are definitely not there, but the biggest problem is that we used our trump card when times are good (pardon the pun), no ammo for the next recession.  For the federal govt, like 70% of spending is transfers and military, so talking about lazy public servants is basically a moot point.  Social Security should have a higher retirement age (in my world mainly for white collar workers but ppl would say that's unfair).  Govt health care should be reformed (but I'm not going to state my views on that).  Same with military.

 

These problems definitely exist more with states, including the one big problem of the pensions.

[Guest MarkS]

The problem is not to look at the total debt but the growth rate of debt. If debt grows slower than total gdp growth (ie with inflation added), basic math like in a dcf will imply debt to gdp will stabilize at some value.  With the new tax cut we are definitely not there, but the biggest problem is that we used our trump card when times are good (pardon the pun), no ammo for the next recession.  For the federal govt, like 70% of spending is transfers and military, so talking about lazy public servants is basically a moot point.  Social Security should have a higher retirement age (in my world mainly for white collar workers but ppl would say that's unfair).  Govt health care should be reformed (but I'm not going to state my views on that).  Same with military.

 

These problems definitely exist more with states, including the one big problem of the pensions.

 

I'm hoping that the tax cuts will generate more than enough growth to offset the loss of tax revenue.  It's probably to early to determine if it will.  But I remain hopeful.  I would only add to your post that the debt to GDP ratio has been going in the wrong direction for years. https://tradingeconomics.com/united-states/government-debt-to-gdp 

[cameronfen]

The problem is not to look at the total debt but the growth rate of debt. If debt grows slower than total gdp growth (ie with inflation added), basic math like in a dcf will imply debt to gdp will stabilize at some value.  With the new tax cut we are definitely not there, but the biggest problem is that we used our trump card when times are good (pardon the pun), no ammo for the next recession.  For the federal govt, like 70% of spending is transfers and military, so talking about lazy public servants is basically a moot point.  Social Security should have a higher retirement age (in my world mainly for white collar workers but ppl would say that's unfair).  Govt health care should be reformed (but I'm not going to state my views on that).  Same with military.

 

These problems definitely exist more with states, including the one big problem of the pensions.

 

I'm hoping that the tax cuts will generate more than enough growth to offset the loss of tax revenue.  It's probably to early to determine if it will.  But I remain hopeful.  I would only add to your post that the debt to GDP ratio has been going in the wrong direction for years. https://tradingeconomics.com/united-states/government-debt-to-gdp

 

I think that the tax cut being revenue neutral is unlikely. The point where revenue for government is maximized is according to some economists (one cant really trust this as we've havent been in this bracket in recent times) is around 70 to 80% top marginal.  Below this level increases increase revenue and we are way below this.  Doesnt mean tax cut was wrong, but it definitely could have been timed better (like the next recession). 

[rkbabang]

What about military spending?

 

The U.S. is spending way too much on that during peace time. It should be something that could be ramped up and down depending on need.

 

Cardboard

 

There can be no serious talk about cutting spending and doing something about the debt unless military spending cuts are #1 on the list.  Military spending is out of control and needs to be slashed massively.

[cubsfan]

What about military spending?

 

The U.S. is spending way too much on that during peace time. It should be something that could be ramped up and down depending on need.

 

Cardboard

 

There can be no serious talk about cutting spending and doing something about the debt unless military spending cuts are #1 on the list.  Military spending is out of control and needs to be slashed massively.

 

Certainly will be easier to do if Trump gets NATO members to kick in their committed shares.

[Guest MarkS]

We could also look at Switzerland's debt brake.  I've just started reading about it - seems interesting.

https://www.avenir-suisse.ch/en/debt-brake/

[Spekulatius]

We could also look at Switzerland's debt brake.  I've just started reading about it - seems interesting.

https://www.avenir-suisse.ch/en/debt-brake/

 

Germany also has a balanced fiscal budget. Same idea.

[rb]

I apologize. I realize now that I should have expanded on it.

 

So there is such a number that is called unfunded liability and I think from memory that 120 Trillion sounds about right. But the only useful thing about that number is that you can use it to write scary headlines. 120 trillion sounds very big. Then you add the word unfunded which sounds very scary. But the unfunded liabilities number is meaningless in itself. Here's why.

 

The unfunded liabilities counts the total future payments under a number of programs - though social security and medicare make up the bulk of it. The present value of the unfunded liability I think is around 50 Tn. But the real reason the number is meaningless is that it doesn't take into account the payroll tax the the US government collects to pay for these benefits. If we would shut down the US economy today, then yes you would have a 50 trillion liability. However the US economy will not shut down today. It employs millions of people and it will employ more people every year in the future. These people, as anyone who gets a paycheck knows, will pay lots and lots of trillions to offset that liability.

 

Looking at the unfunded liability is like looking at a the liability of a life insurance policy and ignoring the premiums. It's meaningless. What one should look at to get to any sort of meaning is a sort of funding gap: PV of unfunded liability - PV of future payroll taxes. But then the stories would become a lot more boring.

I would like to challenge you on that. :)

I work under the assumptions that 1-debt over GDP should stop growing at some point (and maybe that point has been reached?), 2-payroll taxes account for only about a third of revenues and 3-aging demographic pattern will cause a disproportionate increase in Medicare and other mandatory spending AND conclude that the fiscal gap has been and, absent major changes, will continue to grow larger and larger.

 

Where am I wrong?

 

This "unfunded" question is interesting. I've been looking into GE (I assume you are also) and have spent some time on their unfunded (assets-liabilities=a negative number) pension situation. Last time I looked, there was a 29B gap and some suggest that the gap is only theoretical and one should not worry if GE continues as a going concern and, in a way, that's fair. But why let such a gap build up? What if interest rates go down instead of up? What if markets fall (for real)? I would say GE will be interesting to follow and boring, it probably won't be, cashflow wise.

 

Isn't it easier to deal with a growing gap early on?

You haven't really challenged anything. All I did was explain what is the unfunded liability number and why it's face value is meaningless due to the semantics around the issue. I makes for great copy though.

 

The GE comparison is and isn't relevant. The only way it is relevant is that GE for YEARS elevated its profits at the expense of its pension fund. Now the company will (hopefully) have to catch up on pension contributions and will underearn its potential. So you had wealth transfer from current GE shareholder to the GE shareholders of the past. Similarly some people were undertaxed creating deficits, gaps, etc and because of that others will have to be overtaxed to make up the difference. Is it fair? No, but what are you gonna do?

 

That's where the similarities end. The diferences are many. GE isn't a sovereign and the US is. That comes with a whole host of tools and some problems as well. Also the US liabilities are a whole lot more long lived than GE's. That gives options.

 

I don't think that thumb sucking should be encouraged or ok. But since you're talking about a sovereign things get complicated because the sovereign is also in charge of the wellfare of the people, not just an actuary. So should you cause another great depression in order to balance the accounts or better not? In Shakespearean terms that is one of the questions.

 

 

[Cigarbutt]

You haven't really challenged anything. All I did was explain what is the unfunded liability number and why it's face value is meaningless due to the semantics around the issue. I makes for great copy though.

 

The GE comparison is and isn't relevant. The only way it is relevant is that GE for YEARS elevated its profits at the expense of its pension fund. Now the company will (hopefully) have to catch up on pension contributions and will underearn its potential. So you had wealth transfer from current GE shareholder to the GE shareholders of the past. Similarly some people were undertaxed creating deficits, gaps, etc and because of that others will have to be overtaxed to make up the difference. Is it fair? No, but what are you gonna do?

 

That's where the similarities end. The diferences are many. GE isn't a sovereign and the US is. That comes with a whole host of tools and some problems as well. Also the US liabilities are a whole lot more long lived than GE's. That gives options.

 

I don't think that thumb sucking should be encouraged or ok. But since you're talking about a sovereign things get complicated because the sovereign is also in charge of the wellfare of the people, not just an actuary. So should you cause another great depression in order to balance the accounts or better not? In Shakespearean terms that is one of the questions.

The fiscal gap, like intrinsic value, is hard to figure out exactly because there are so many assumptions. It doesn’t mean we shouldn’t try to put a range on it. :) So, there is some kind of gap that has been growing, call it inter-generational, inter-temporal, “new era” or whatever.

 

The parallel with GE is poor but the idea is that future events will eventually end up on your doorstep. What did GE leaders do when they realized (somehow) that imbalances were growing? Don’t you think it will become increasingly difficult to deal with the fiscal gap issue (whatever strategy or vision) as both ends are becoming more polarized, as leading factions from both sides need to feed their evermore-distanced bases and as raising taxes and/or decreasing benefits will become more and more unpalatable to the general population who don’t spend their days calculating the infinite-horizon present day values of future circumstances?

 

FWIW, The Merchant of Venice is one of my Shakespeare’s favorites, maybe because it deals with the tension that exists between personal contract liens and public policy and because it shows how debt can be dangerous. In those days, debt could mean to be a poison. Now, with our macro-prudential policies, I wonder if debt has not become a slow-acting anaesthetic?

 

Why keep waiting when we know that the ultimate price tag will keep getting larger (absolute and relative basis)?

Human nature I guess.

 

Have you read Dow 36,000: The New Strategy for Profiting from the Coming Rise… and Bubbleology by Kevin A. Hassett. If not, here is a short summary: who cares about tomorrow where there is a long line of greater fools? What is fascinating is that Mr. Hassett is now the Presidential Chairman of the Council of Economic Advisers of the United States of America.

 

And then:

https://news.gallup.com/poll/246800/record-high-name-government-important-problem.aspx?utm_source=alert&utm_medium=email&utm_content=morelink&utm_campaign=syndication

…

[Liberty]

Debt is 22 trillion.

 

What are the assets?

 

https://ritholtz.com/2015/10/dont-suffer-from-denominator-blindness/

[Guest MarkS]

Debt is 22 trillion.

 

What are the assets?

 

https://ritholtz.com/2015/10/dont-suffer-from-denominator-blindness/

 

I'm in favor of selling California to Mexico. 

[cubsfan]

Debt is 22 trillion.

 

What are the assets?

 

https://ritholtz.com/2015/10/dont-suffer-from-denominator-blindness/

 

I'm in favor of selling California to Mexico. 

 

I love this idea - but they need to keep the fruitcakes too!

[Cigarbutt]

Debt is 22 trillion.

 

What are the assets?

 

https://ritholtz.com/2015/10/dont-suffer-from-denominator-blindness/

I'm in favor of selling California to Mexico. 

An excellent deal was the 1803 purchase of Louisiana (a nice example of the importance of holding on to valuable assets).

What are the assets is a good question:

https://en.wikipedia.org/wiki/Financial_position_of_the_United_States

 

Using the four Cs of credit analysis, within the Capacity lie asset-based and cashflow-based (ie GDP) ratios but the most important one remains Character.

At least, that's what JP Morgan said at a congressional hearing.

[rkbabang]

Debt is 22 trillion.

 

What are the assets?

 

https://ritholtz.com/2015/10/dont-suffer-from-denominator-blindness/

 

I'm in favor of selling California to Mexico. 

 

I'm in favor of spinning off a bunch of states.  The US should break into 4.  The 2 coasts can each be the liberal leftist socialists paradises that they want to be.  The middle can go to the conservatives.  And give the libertarians New Hampshire.

 

The notion that 320+ million people spread over most of one of the Earth's continents will all have the same culture and want the same type of government is absurd.

 

It’s Time For The United States To Divorce Before Things Get Dangerous

 

[DooDiligence]

Debt is 22 trillion.

 

What are the assets?

 

https://ritholtz.com/2015/10/dont-suffer-from-denominator-blindness/

 

I'm in favor of selling California to Mexico. 

 

I'm in favor of spinning off a bunch of states.  The US should break into 4.  The 2 coasts can each be the liberal leftist socialists paradises that they want to be.  The middle can go to the conservatives.  And give the libertarians New Hampshire.

 

The notion that 320+ million people spread over most of one of the Earth's continents will all have the same culture and want the same type of government is absurd.

 

It’s Time For The United States To Divorce Before Things Get Dangerous

 

Heyyy, what about Florida?

[rb]

Nobody wants Florida. You guys are too weird.

[DooDiligence]

Nobody wants Florida. You guys are too weird.

 

I knew you'd bite if I dangled enough bait.

[Spekulatius]

The left coast would do well as one state. I think Texas would want to do go it alone too.the North Eastern New England state fit together well  and I would include NH :-). The Rocky Mountain states have a lot in common. The south would probably come together under a confederate flag. The rest - who cares  :o.

[Gregmal]

The above is pretty much what the founding fathers had envisioned. Federal government has gotten WAYYY too powerful. States should be able to control their own "stuff". At the end of the day we'd probably have more harmony because people would move to regions and areas that suite their interests.

[DooDiligence]

The above is pretty much what the founding fathers had envisioned. Federal government has gotten WAYYY too powerful. States should be able to control their own "stuff". At the end of the day we'd probably have more harmony because people would move to regions and areas that suite their interests.

 

That would be a great way to ensure we never have another civil war  :o

[rkbabang]

Debt is 22 trillion.

 

What are the assets?

 

https://ritholtz.com/2015/10/dont-suffer-from-denominator-blindness/

 

I'm in favor of selling California to Mexico. 

 

I'm in favor of spinning off a bunch of states.  The US should break into 4.  The 2 coasts can each be the liberal leftist socialists paradises that they want to be.  The middle can go to the conservatives.  And give the libertarians New Hampshire.

 

The notion that 320+ million people spread over most of one of the Earth's continents will all have the same culture and want the same type of government is absurd.

 

It’s Time For The United States To Divorce Before Things Get Dangerous

 

Heyyy, what about Florida?

 

Too hot and humid.  Whoever wants it.

 

[Liberty]

The government's main asset, against which it holds the debt, is the country's economy and population, on which is basically has a royalty through taxation. On top of all the land and mineral wealth and such (cue Rk's rant about how this is theft and shouldn't be like that, etc. Meanwhile, that's how things are).

 

I'm not saying the debt isn't too big, just that it has to be kept in context, otherwise it's just throwing around big numbers that don't mean anything.

 

If Mr. Bob owes 1 million dollars, that doesn't tell you much about whether he's in trouble or not. You have to know his income, how fast that grows, what assets he has, what he's paying in interest, etc.

[Guest MarkS]

The government's main asset, against which it holds the debt, is the country's economy and population, on which is basically has a royalty through taxation. On top of all the land and mineral wealth and such (cue Rk's rant about how this is theft and shouldn't be like that, etc. Meanwhile, that's how things are).

 

I'm not saying the debt isn't too big, just that it has to be kept in context, otherwise it's just throwing around big numbers that don't mean anything.

 

If Mr. Bob owes 1 million dollars, that doesn't tell you much about whether he's in trouble or not. You have to know his income, how fast that grows, what assets he has, what he's paying in interest, etc.

 

I agree in principal with the proposal that debt needs to be looked at in relation to assets.  I also agree debt needs to be looked at "in context." I just wish you would provided a context.

 

I apologize. I realize now that I should have expanded on it.

 

So there is such a number that is called unfunded liability and I think from memory that 120 Trillion sounds about right. But the only useful thing about that number is that you can use it to write scary headlines. 120 trillion sounds very big. Then you add the word unfunded which sounds very scary. But the unfunded liabilities number is meaningless in itself. Here's why.

 

The unfunded liabilities counts the total future payments under a number of programs - though social security and medicare make up the bulk of it. The present value of the unfunded liability I think is around 50 Tn. But the real reason the number is meaningless is that it doesn't take into account the payroll tax the the US government collects to pay for these benefits. If we would shut down the US economy today, then yes you would have a 50 trillion liability. However the US economy will not shut down today. It employs millions of people and it will employ more people every year in the future. These people, as anyone who gets a paycheck knows, will pay lots and lots of trillions to offset that liability.

 

Looking at the unfunded liability is like looking at a the liability of a life insurance policy and ignoring the premiums. It's meaningless. What one should look at to get to any sort of meaning is a sort of funding gap: PV of unfunded liability - PV of future payroll taxes. But then the stories would become a lot more boring.

I would like to challenge you on that. :)

I work under the assumptions that 1-debt over GDP should stop growing at some point (and maybe that point has been reached?), 2-payroll taxes account for only about a third of revenues and 3-aging demographic pattern will cause a disproportionate increase in Medicare and other mandatory spending AND conclude that the fiscal gap has been and, absent major changes, will continue to grow larger and larger.

 

Where am I wrong?

 

This "unfunded" question is interesting. I've been looking into GE (I assume you are also) and have spent some time on their unfunded (assets-liabilities=a negative number) pension situation. Last time I looked, there was a 29B gap and some suggest that the gap is only theoretical and one should not worry if GE continues as a going concern and, in a way, that's fair. But why let such a gap build up? What if interest rates go down instead of up? What if markets fall (for real)? I would say GE will be interesting to follow and boring, it probably won't be, cashflow wise.

 

Isn't it easier to deal with a growing gap early on?

You haven't really challenged anything. All I did was explain what is the unfunded liability number and why it's face value is meaningless due to the semantics around the issue. I makes for great copy though.

 

The GE comparison is and isn't relevant. The only way it is relevant is that GE for YEARS elevated its profits at the expense of its pension fund. Now the company will (hopefully) have to catch up on pension contributions and will underearn its potential. So you had wealth transfer from current GE shareholder to the GE shareholders of the past. Similarly some people were undertaxed creating deficits, gaps, etc and because of that others will have to be overtaxed to make up the difference. Is it fair? No, but what are you gonna do?

 

That's where the similarities end. The diferences are many. GE isn't a sovereign and the US is. That comes with a whole host of tools and some problems as well. Also the US liabilities are a whole lot more long lived than GE's. That gives options.

 

I don't think that thumb sucking should be encouraged or ok. But since you're talking about a sovereign things get complicated because the sovereign is also in charge of the wellfare of the people, not just an actuary. So should you cause another great depression in order to balance the accounts or better not? In Shakespearean terms that is one of the questions.

 

 

 

The trustees puts out a report each year on the state of the trust.  They clearly use a cash flow methodology that you advocate.  Using this method they still come up with a 25 to 30 Trillion dollar deficit.  (Unfortunately the real problem is medicare/medicaid.) In the 70 odd years since the institution of the  system they've built a surplus of about 2.9 trillion.  Starting in 2018 the fund has started running a deficit that is expected to continue until the surplus is gone in about 16 or so years.  We should raise payroll taxes substantially and do it sooner rather than later