The U.S. Department of the Treasury’s Office of Debt Management made a presentation to the Treasury Borrowing Advisory Committee on February 1. The presentation was analyzed by Karl Denninger on The Market Ticker. Denninger points out that federal debt roughly doubled from 1980 to 1990; doubled again from 1990 to 2000; and again from 2000 to 2010.
We’re going double it again? We did it three times. We hit the wall in 2007, which is why the recession happened. What makes you think we can keep borrowing and spending and not run right into that wall again?
The really awful news is in here. Interest payments rise, according to OMB projections, from about $180 billion to over $800 billion in 2020.
The budget is about $3.7 trillion. Of that we take in about $2 trillion in taxes. The rest is being borrowed at present. There’s no way we can possibly put more than 20% of federal revenue toward interest, and this presumes a 3% interest rate on that debt, which is insanely optimistic after we manage to pile on another double. If we get a “Greece” style response and rates shoot upward, well, you can forget about it.
We won’t get there folks. It’s not possible. The market won’t allow it and The Fed can’t control it.
This chart, from the Treasury Department report, is chilling. Click to enlarge:
The Treasury Department report says, optimistically, that there are people who will continue buying our bonds, like pension funds–to the tune of $425 billion. Only there is a catch:
Note carefully the “insurers/pension” category. Do that and the 8% return they’re counting on turns into 3% (or the Treasury detonates, since that’s the OMB baseline expectation.) But if they only get 3% or 4% then every Pension fund in the United States detonates instead.
A reader makes the point explicit:
I especially like the subtle point that the Treasury assumes — simultaneously — that a big potential market exists for Treasury issues among pension funds…and that since the funds are assuming broadly speaking 8% returns to be in actuarial balance….the Treasury assumption of 3% long term interest rates is in conflict with the pension assumptions!
So the canoe is going over the waterfall:
There’s plenty of arm-waving in the presentation that is all an attempt to claim that “we can make this work.”
No, we can’t.
The budget deficit has to be brought negative, and this means a cut in federal spending by 50%.
Which, incidentally, only takes spending back to 2000 levels.
We don’t have a choice folks, and we have to do it now.
We must get rid of fully half of all federal spending and we must run a primary budget surplus including all off-balance sheet items such as Social Security and Medicare.
I know nobody wants to hear it, but that doesn’t matter. It has to happen. If it doesn’t, and there’s no evidence that it will, then at some time well before the 2020 line is reached the market will come to the conclusion that we will not fix the problems.
On the day that happens yields will ratchet and the spiral – the last one – will begin.
Hey, don’t worry–we have Barack Obama at the helm. And he can’t even understand his own budget.