DOUBLING TIME = 72/rate of interest
Math can be a real bitch.
The numbers behind this story come from the Wall Street Journal, “National Debt Is Projected To Nearly Double in 30 Years,” (paywall) 3/30/17. For a Zero Hedge summary, see “CBO Warns Of Fiscal Catastrophe As A Result Of Exponential Debt Growth In The U.S.”
The Congressional Budget Office (CBO) released figures this week on the government’s deficits and the national debt that are downright scary. Unfortunately, they’re not nearly scary enough. The assumptions the CBO incorporates are optimistic and will almost certainly be undercut by reality.
The headline projection was the national debt will almost double in 30 years. Using the rule of 72, T=72/r, where T is the time in years required for principle to double and r is the annual interest rate compounded, a 30-year doubling time implies the debt is growing at 2.4 percent annually (30=72/2.4). However, the national debt almost doubled during George W. Bush’s two terms, and almost doubled again during Barack Obama’s two terms. That implies a T of a little more than 8 years. To be conservative (because debt almost doubled but not quite), round the T up to 9 years. Plug that into the rule of 72, and you have the debt growing at 8 percent per year (9=72/8), or over 3.3 times the rate the CBO is assuming. Scary as that 30-year doubling sounds, simply extrapolating the reality of the last 16 years projects another doubling in not 30, but 9 years, or a year longer than Donald Trump’s potential two terms.
But wait, there’s more. The CBO assumes the 10-year Treasury rate will be 1.5 percent after inflation over the long term, but last year that rate was 1.9 percent and the year before, 2.2 percent. Ask yourself, with exploding debt and an increasing supply of Treasury bills, notes and bonds, are real rates (the interest rate after inflation) likely to go higher or lower? The CBO says lower; SLL says higher. The CBO also assumes that potential GDP will grow at 1.9 percent per year over the long term, although it grew an estimated 1.6 percent last year. Ask yourself, with debt service consuming an ever larger share of the GDP (see next paragraph), will that help or hamper economic growth? The CBO says it will help; SLL says it will hamper. Finally, the CBO assumes that net interest costs will average 2.1 percent of the GDP over the next decade, although last year they were 2.5 percent. Again, ask yourself, will a rising national debt lead to more or less debt service cost relative to the GDP? The CBO says less; SLL says more.
Even the too rosy CBO numbers paint a grim picture. It projects that debt service’s share of total federal spending will triple, from the present 7 percent to 21 percent, over the next 30 years. In the same time frame, the national debt as a percent of the GDP will increase from 77 to 150 percent.
President Trump wants to spend “yugely” on infrastructure, increase the military’s budget, cut taxes, and not touch entitlement spending. This is all pure fantasy; it’s simply not going to happen. Something’s got to give, and it will probably start in the bond market. Indeed, it probably already has; the 10-year Treasury rate reached generational lows last July and interest rates have been in an irregular uptrend since. So if you read the Zero Hedge CBO post and are feeling glum, cheer down; you’re not feeling glum enough. Unfortunately, this is not an April Fools gag.
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Entirely OT; something rather more cheerful – somehow, I get the idea you might could use that right now. Not too long, part fiction, part essay, all transcendental: A Map of Mankind.
I’ll take a look when I get a chance and report back. Thanks.
Keynesian socialism has run it’s course,
It’s time to dismount from this dying horse,
The social engineers have had their kicks,
Time to send them across the river styx,
The republic needs to file for divorce.
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Not everyone’s got time for verse
I like your poem, witty and terse
Some will say it’s just a rhyme
I say it stands the test of time
OMG, you guys are witty,
How I liked your little ditty,
Lead and Silver … sitting pretty,
Just in case the world turns unpleasant.
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Civilization in 2017- this is priceless!!!
WELCOME To 2017
� Our Phones – Wireless
� Cooking – Fireless
� Cars – Keyless
� Food – Fatless
� Tires -Tubeless
� Dress – Sleeveless
� Youth – Jobless
� Leaders – Shameless
� Relationships – Meaningless
� Attitudes – Careless
� Babies – Fatherless
� Feelings – Heartless
� Education – Valueless
� Children – Mannerless
� Country – Godless
And our Politicians-are WORTHLESS!
I’m scared – Shitless!
The math is brutal reality. The Rule of 72 rulea. Based on the numbers, I see the federal debt at 40 trillion in about 9 years, give or take a year. It cheers me down to think of what life will be like at that point. If the American Revolution version 2.0 has not been released.by then, most of us will be living a Turd World lifestyle. Enjoy the decline indeed !
‘Something’s got to give, and it will probably start in the bond market’
I dunno, I’ve been hearing this since nixon finished off the gold backing and I’ve seen every reason under the sun why it’s imminent since. This deficit shit can probably go on for 1000 years. Remember, the market can remain irrational longer than you can remain solvent.
It can only go on until the INTEREST on the total debt exceeds the revenues collected. When, not if, that happens, the fertilizer hits the overhead oscillator.
Not sure about that. I think the Fedgov could go ahead and borrow new debt to pay interest on the old debt thereby staying solvent. When the Fed can create money from thin air and loan it to Fedgov, why does SHTF? You can’t do this, but Fedgov can. Try to imagine the scenario when Fed tells Fedgov, “sorry you’re overextended.” I cannot.
It won’t be the fed telling them, it will be the investor who will refuse to buy into an obvious ponzi scheme. Besides, if all of the revenue is being used to pay the % on the debt, there is nothing left for the rest of the budget. The interest rates needed to attract enough dummies to buy fed debt instruments under these conditions would break the credit market.
Could be a long time before anyone’s willing to pull that plug, and the longer it goes the harder it is to pull.
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As long as everyone, from The Donald, to the Bankseters, down to the Wal Mart customer agrees to the rules of the game, things will continue to lurch down the road. I’ll believe this when it happens. However, I have prepared for the worst.
The treasury debt (there is other agency debt) doubled in 8 years under Obama….No reason to think that can’t happen again, when Trump is talking about increasing the defense budget, when 10 trillion is unaccounted for in the Pentagon.
Aprox. 22 % of the budget is defense, 66% entitlement spending. Which one will break the bank first?
I was not asked to contribute to Social Security, nor was I asked to pay into Medicare. So my attitude is ” entitlements, my ass”. For me it is simply being payed back.
The average recepient of soc sec gets back far more than they ever paid in. That’s how a ponzi scheme works. It is a grand illusion that we can expect to draw 9 lbs of shit from a 7 lbs sack ad infinitum.
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