patrick.net

Current debt is now $15.5T. I think it is accelerating, and our annual rate of increase is now $1.5T. Uncle Sam is making $2.2T in tax revenue but spending close to $3.7T.

One solution is to simply force ourselves to live within our means. Lots of cuts: military, government jobs, social services, etc, etc, etc. Implement in a very Draconian way. Whoever imposes this rule will be the most hated person in the country, but it is necessary to experience acute pain in order to avoid apocalyptic pain.

This brute force austerity would have to be around $1.5T (ignoring unfunded liabilities). Also, since GDP will become smaller, the debt-to-GDP ratio will increase. We're looking at a GDP contraction twice the size of the 2008 recession.

Our unfunded liabilities are estimated at $61T (this number changes depending on who you ask, but the range is something like $55T - $120T). So my guess is increasing our debt ceiling to $80T is not even enough to cover our liabilities.

In reality, a $80T in debt is not possible, since we're already spending $480B a year in interest payments.

All these numbers and thoughts were just off the top of my head. Let me know if I'm wrong.

tdeloco says

One solution is to simply force ourselves to live within our means.

No chance, because of the simple fact that USD is the world reserve currency.

http://www.youtube.com/embed/OeIFcuVTS3U

Think about a debtor who owes a hard debt to a loan shark versus a junkie who owes a regular, ongoing, hard fix to himself. Which one is worse off? Which more desperate?

http://fofoa.blogspot.com/2011/11/moneyness.html

tdeloco says

Whoever imposes this rule will be the most hated person in the country, but it is necessary to experience acute pain in order to avoid apocalyptic pain.

Exactly, you've answered the question yourself. Which politician would be willing to commit this suicide? The only one who has any semblance of a realistic plan does not have a realistic shot at presidency.

So in all likelihood, this path will not be chosen.

tdeloco says

So my guess is increasing our debt ceiling to $80T is not even enough to cover our liabilities.

Your numbers sound pretty close to reality I think.

IMHO, The trade deficit in our goods and services is a much bigger risk than the debt servicing.

uomo_senza_nome says

IMHO, The trade deficit in our goods and services is a much bigger risk than the debt servicing.

You could be right, but I never understood why. Maybe I'm just dumb?

A trade deficit simply means we're consuming more stuff than we're producing. Which means we're basically getting "somthing for nothing."

Common sense says this situation won't last forever. Rational parties generally don't like to produce more for someone else than they get in return. Eventually other nations will want more than just green paper with pictures of dead presidents.

That change probably won't come as a sudden "shock", but rather as a gradual adjustment. More specifically: if we're flooding the world with greenbacks, exchange rates will gradually adjust to make U.S. dollar worth less, which will encourage exports and discourage imports.

A sudden shock is more the norm. The usual end game to this is a currency devaluation or default on debts ala Argentina. Then imports become expensive and exports become cheap so exports ramp up and goose the economy. With lots and lots of pain for the vast majority of the population along the way.

Is there a way to make it more gradual, rather than a sudden shock? I would think both the U.S. and trading partners like China would prefer something gradual to something sudden. Assuming that's even possible.

wthrfrk80 says

A trade deficit simply means we're consuming more stuff than we're producing. Which means we're basically getting "somthing for nothing."

Yep.

wthrfrk80 says

Eventually other nations will want more than just green paper with pictures of dead presidents.

Yep.

wthrfrk80 says

That change probably won't come as a sudden "shock", but rather as a gradual adjustment.

A crisis of confidence is more likely to be a sudden shock rather than a gradual adjustment.

You'll have to read the full link below (it's really long ;)) to understand why a sudden shock is the norm.

http://fofoa.blogspot.com/2011/11/moneyness.html

wthrfrk80 says

More specifically: if we're flooding the world with greenbacks, exchange rates will gradually adjust to make U.S. dollar worth less, which will encourage exports and discourage imports.

Discourage imports? Are you kidding? net-net, we consume much more than we produce. So to bring US back to a realistic life style would mean staring at a huge contraction. Politically not feasible.

bob2356 says

The usual end game to this is a currency devaluation or default on debts ala Argentina.

that's hyperinflation.

uomo_senza_nome says

IMHO, The trade deficit in our goods and services is a much bigger risk than the debt servicing.

I completely agree. Furthermore, look at Japan. They been running a small trade surplus for the past two decades. Now their debt is more than twice their GDP. The Japanese trade surplus simply wasn't big enough to save themselves. Our trade deficit is making us borrow faster.

wthrfrk80 says

More specifically: if we're flooding the world with greenbacks, exchange rates will gradually adjust to make U.S. dollar worth less

wthrfrk80, that's the prevailing theory. However, the assumption were thrown out the window a long time ago. Here is a quote from: Carole E. Scott, Professor of Economics, State University of West Georgia.

Therefore, trade deficits are, ceteris paribus, self correcting. This is because, ceteris paribus, the currency of the country running a deficit will depreciate, while the country running a surplus will appreciate.

Do notice that she kept saying ceteris paribus (all other things remaining constant or equal). This means no currency pegs.

Without currency pegs, trade deficits are merely transitory imbalances, and they will self-correct. With currency pegs, trade deficits become a persistent imbalance.

In order to maintain these currency pegs, China has to warehouse tons of US Dollars and buy tons of treasury notes.

Recent articles are saying that China's treasury holdings have decreased to $1.1T (down from $1.7T). I have no data on what they have done with that money. Perhaps they're just warehousing it somewhere as cash. If they've been spending it, that money will come back to the U.S. and we'll have a trade surplus. But, instead, we have a large trade deficit last year, about $550B for year 2011.

uomo_senza_nome says

Discourage imports? Are you kidding? net-net, we consume much more than we produce. So to bring US back to a realistic life style would mean staring at a huge contraction. Politically not feasible.

My point was that currency exchange rates (i.e. a weaker dollar) would force a decrease in imports and increase in exports. This is already happening in the oil markets. Could politicians even stop that from happening if they tried?

exchange rates will gradually adjust to make U.S. dollar worth less, which will encourage exports and discourage imports.
I guess I am in the gradual (yet painful, think slowly boiling the frog) camp with you. Minimum wage laws are being established in many Asian countries. On the plus side, jobs from high cost countries (read: Canada, Japan) are returning to the US.

wthrfrk80 says

My point was that currency exchange rates (i.e. a weaker dollar) would force a decrease in imports and increase in exports.

Au Contraire, it would actually force us to increase our imports because we are predominantly a consumer economy, therefore devaluing the unit of account would force the prices of the products we consume higher. Because there's not enough money, we'll print even more. This is the positive feedback loop for hyperinflation.

What we really need is to increase our capacity to produce and make us a more balanced economy, as opposed to a one-sided consumer only economy (consumer component is the bulk of our GDP).

The problem with economics is that it is a highly non-linear process and we can't predict "if you do this, that will happen" because of the non-linear and dynamic nature.

wthrfrk80 says

This is already happening in the oil markets. Could politicians even stop that from happening if they tried?

Politicians and policy makers can only slow down the ongoing damage, which is serious deleveraging for a decade or more. They can't control every single variable and it would be a folly for them to even think like that.

Like it or not, we are going to have the Fed. At least, the Fed should admit that promoting stability over resilience is a very bad idea, which is what it has been doing for the past decade or more.

I hope the people following the thread noted that Geithner did not try to dispute the $20/$50 trillion number that Congressman Gowdy threw out.

tdeloco says

All these numbers and thoughts were just off the top of my head. Let me know if I'm wrong.

Actually I don't think the 80T number is fully correct, it's likely to be even more.

Please consider: http://truthingold.blogspot.com/2012/03/how-much-treasury-debt.html

The REAL direct Treasury/Taxpayer guaranteed debt number right now is at LEAST $25 trillion. This includes the $16.2 Trillion current limit PLUS the $7 Trillion in FNM/FRE Goverment guaranteed debt PLUS the Treasury bonds sitting in the Social Security Trust ($2.5 trillion last time looked). I have not included a lot of other small off-balance-sheet guarantees like GMAC (now called Ally) debt, Fed assets which are direct off-balance-sheet liabilities of the Treasury/Taxpayer and some other stuff. I would bet real money that the REAL number is closer to $30 Trillion.

This does not include the GAAP accounting for the all of the future entitlement and welfare obligations. The net present value of this - i.e. if the Government had to account for its numbers like a corporation does - is more like $100 Trillion. That is not my estimate. That is a number that comes from David Walker, the former chief of the Congressional Budget Office.

I wish Gowdy would have asked him to define "UNCOMFORTABLE". I do not believe an amount would cause the anxiety. The feasibility would cause nausea.