The CBO projects that the FY2014 budget deficit will be $514 billion, 3% of GDP, and will be just $478 billion or 2.6% of GDP in FY2015. The deficit then begins to rise as a percentage of GDP. A key reason: interest on the debt. While a manageable $233 billion or 1.3% of GDP today, debt service will reach $880 billion by 2024, a whopping 3.3% of projected 2024 GDP.
Tag Archives: debt
Doubling Debt
While per capita debt has ballooned from $1,640 in 1/66 to $53,000 today, it’s the growth rate that matters. Between 1/66 and 10/77 (11.75 years) the debt doubled. It doubled again by 7/84 (6.75 years), again by 10/90 (6.25 years), again by 7/05 (14.83 years) and again by 1/13 (7.5 years). The debt actually grew faster between 10/77 and 10/90 than today. Yet, we survived the debt-soaked 80s!
Debate’s Effect on Sentiment
The University of Michigan consumer sentiment index fell to 54.9 (the lowest level since the recession of ‘81)! This reading is, I think, a result of the corrosive debt ceiling debate; not due to chronic problems like high unemployment and the poor economy. If I am right, the index will largely bounce back next month to the anemic levels we have been enjoying for quite some time; between 60 and 70.
Blackmailer’s Paradox
Faced with a no new taxes or a debt default ultimatum from the Tea Party, Obama should have either called their bluff and appeared genuinely willing to let the US default or should have pursued the 14th amendment option with its language about “the validity of the public debt.” Either strategy would have attenuated Tea Party leverage and gotten Obama out of the Blackmailer’s Paradox.
Countercyclical Measures
Including the stimulus, tax cuts, bailouts, home and car subsidies and automatic stabilizers (i.e. unemployment insurance and food stamps) the Great Recession will add about $4.2 trillion to the federal debt by the time it ends. The largest contributor; automatic stabilizers. They kick in when the economy slows. These stabilizers will add about $1.9 trillion to the debt by the time the economy is back to normal in 2016.
Credit Default Swamps
Based on my calculations, credit default swaps are trading as if Greece has a 70% chance of defaulting, 50% for Ireland, 40% for Portugal and 30% for Spain. Both Greece and Ireland are paying over 80% of their export revenues towards external debt payments which totally unsustainable. After Portugal, Spain is next, then maybe Belgium. This story is as contained as the Asian crisis was limited to Thailand 12 years ago.
Hello? The Irish election in March
The Irish election in March ― I don’t think this is on the radar screen. The point worth making is that if the opposition party wins, and presses for a debt restructuring, the story isn’t going to end there. The real question from there would be what other countries would follow suit ― this to me is probably the big “financial contagion” risk for 2011.