Best of the Week
Most Popular
1. Market Decline Will Lead To Pension Collapse, USD Devaluation, And NWO - Raymond_Matison
2.Uber’s Nightmare Has Just Started - Stephen_McBride
3.Stock Market Crash Black Swan Event Set Up Sept 12th? - Brad_Gudgeon
4.GDow Stock Market Trend Forecast Update - Nadeem_Walayat
5.Gold Significant Correction Has Started - Clive_Maund
6.British Pound GBP vs Brexit Chaos Timeline - Nadeem_Walayat
7.Cameco Crash, Uranium Sector Won’t Catch a break - Richard_Mills
8.Recession 2020 Forecast : The New Risks & New Profits Of A Grand Experiment - Dan_Amerman
9.Gold When Global Insanity Prevails - Michael Ballanger
10.UK General Election Forecast 2019 - Betting Market Odds - Nadeem_Walayat
Last 7 days
What UK CPI, RPI INFLATION Forecasts for General Election Result 2019 - 11th Dec 19
Gold ETF Holdings Surge… But Do They Actually Hold Gold? - 11th Dec 19
Gold, Silver Reversals, Lower Prices and Our Precious Profits - 11th Dec 19
Opinion Pollsters, YouGov MRP General Election 2019 Result Seats Forecast - 11th Dec 19
UK General Election Tory and Labour Marginal Seats Analysis, Implied Forecast 2019 - 11th Dec 19
UK General Election 2019 - Tory Seats Forecast Based on GDP Growth - 11th Dec 19
YouGov's MRP Poll Final Tory Seats Forecast Revised Down From 359 to 338, Possibly Lower? - 10th Dec 19
What UK Economy (Average Earnings) Predicts for General Election Results 2019 - 10th Dec 19
Labour vs Tory Manifesto's UK General Election Parliamentary Seats Forecast 2019 - 10th Dec 19
Lumber is about to rally and how to play it with this ETF - 10th Dec 19
Social Mood and Leaders Impact on General Election Forecast 2019 - 9th Dec 19
Long-term Potential for Gold Remains Strong! - 9th Dec 19
Stock and Financial Markets Review - 9th Dec 19
Labour / Tory Manifesto's Impact on UK General Election Seats Forecast 2019 - 9th Dec 19
Tory Seats Forecast 2019 General Election Based on UK House Prices Momentum Analysis - 9th Dec 19
Top Tory Marginal Seats at Risk of Loss to Labour and Lib Dems - Election 2019 - 9th Dec 19
UK House Prices Momentum Tory Seats Forecast General Election 2019 - 8th Dec 19
Why Labour is Set to Lose Sheffield Seats at General Election 2019 - 8th Dec 19
Gold and Silver Opportunity Here Is As Good As It Gets - 8th Dec 19
High Yield Bond and Transports Signal Gold Buy Signal - 8th Dec 19
Gold & Silver Stocks Belie CoT Caution - 8th Dec 19
Will Labour Government Spending Bankrupt Britain? UK Debt and Deficits - 7th Dec 19
Lib Dem Fake Tory Election Leaflets - Sheffield Hallam General Election 2019 - 7th Dec 19
You Should Be Buying Gold Stocks Now - 6th Dec 19
The End of Apple Has Begun - 6th Dec 19
How Much Crude Oil Do You Unknowingly Eat? - 6th Dec 19
Labour vs Tory Manifesto Voter Bribes Impact on UK General Election Forecast - 6th Dec 19
Gold Price Forecast – Has the Recovery Finished? - 6th Dec 19
Precious Metals Ratio Charts - 6th Dec 19
Climate Emergency vs Labour Tree Felling Councils Reality - Sheffield General Election 2019 - 6th Dec 19
What Fake UK Unemployment Statistics Predict for General Election Result 2019 - 6th Dec 19
What UK CPI, RPI and REAL INFLATION Predict for General Election Result 2019 - 5th Dec 19
Supply Crunch Coming as Silver Miners Scale Back - 5th Dec 19
Gold Will Not Surpass Its 1980 Peak - 5th Dec 19
UK House Prices Most Accurate Predictor of UK General Elections - 2019 - 5th Dec 19
7 Year Cycles Can Be Powerful And Gold Just Started One - 5th Dec 19
Lib Dems Winning Election Leaflets War Against Labour - Sheffield Hallam 2019 - 5th Dec 19
Do you like to venture out? Test yourself and see what we propose for you - 5th Dec 19
Great Ways To Make Money Over Time - 5th Dec 19
Calculating Your Personal Cost If Stock, Bond and House Prices Return To Average - 4th Dec 19

Market Oracle FREE Newsletter

UK General Election Forecast 2019

S&P’s Downgrade of U.S. Sovereign Debt – Some People Actually Pay Them for these Opinions?

Interest-Rates / Credit Crisis 2011 Aug 09, 2011 - 02:58 AM GMT

By: Paul_L_Kasriel

Interest-Rates

Best Financial Markets Analysis ArticleS&P stated the obvious after the U.S. markets closed on August 5 – the projected growth in U.S. public debt is on a long-term unsustainable path. Rather than paying S&P for this opinion, all you need to do is look at some past CBO projections and you would have arrived at the same opinion years ago. For example, in December 2007, CBO published the chart immediately below showing its projections of U.S. public debt held by the public as a percent of nominal GDP under two scenarios. The first scenario, the “extended-baseline” scenario, assumed that the federal spending and revenue budgetary legislation that was on the books as fiscal 2007 would prevail over the next 75 years.


One important element of that legislation was that the personal marginal income tax rate structure would return to its 2000 level on January 1, 2011. Under the extended-baseline scenario, U.S. public debt relative to GDP, which was 37% at the end of fiscal 2007, drops to 25% of GDP by the end of fiscal 2025. By 2045, however, debt held by the public rises back to 37% of GDP and to 239% of GDP by 2082. The second scenario, the “alternative fiscal” scenario, assumes, among other things, that the personal marginal income tax rates that prevailed at the end of fiscal 2007 would continue to prevail throughout the 75-year projection period. Under the alternative fiscal scenario, debt held by the public keeps rising from the 37% of GDP at the end of fiscal 2007 and reached 109% of GDP by fiscal 2031 – matching the previous high percentage set at the end of World War II. Things go from bad to worse thereafter. Under either scenario, then, the projected paths of U.S. public debt were unsustainable in long run. So, back in December 2007, actually years before that, without the expert opinion of S&P, you could have known that the U.S. fiscal environment was on a long-run unsustainable course.

Now these CBO projections did not necessarily mean that the actual values of debt to GDP would occur. Legislation could be passed and enacted into law that would change the U.S. federal budgetary course to avoid the economic maladies that would occur otherwise. Granted, the recent political difficulty in passing legislation that calls for only a modest reduction in the projected growth in the public debt is not encouraging with regard to “bending the debt curve” to a sustainable path. That is the reason given by S&P to go ahead with their one-notch downgrade of U.S. debt last Friday. But I reiterate that the unsustainable path on which U.S. public debt is on has been known for years. And the unsustainable debt projections have continued for years, as any thinking person would know (and this even includes bond traders) because the politics of changing this projected course are difficult. This is not new news.

Speaking of bond traders, they have been bidding up the price of U.S. Treasury bonds since S&P issued its negative watch on U.S. sovereign debt on April 18, 2011. The chart below shows the yield on the 10-year U.S. Treasury yield has fallen from 3.40% on Monday, April 18, to 2.58% on Friday, August 5. As this is being written on Monday morning, August 8, the first business day after the announcement by S&P of its U.S. debt downgrade, the Treasury 10-year security is trading at a yield of 2.39%. Probably the only entity more frustrated than S&P for not heeding their opinion on U.S. debt is PIMCO!

Interestingly enough, since S&P put U.S. sovereign debt on a negative watch in mid April, it has been U.S. private debt that seems to have been adversely affected by default risk. As the chart below shows, since April 18 through August 5, the yield spread between high-yield corporate bonds and U.S. Treasury 10-year securities has widened by 157 basis points. So, all those talking heads on cable television who said that your borrowing costs would go up if U.S. sovereign debt were downgraded might have been right – right, but for the wrong reason.

Paul Kasriel is the recipient of the 2006 Lawrence R. Klein Award for Blue Chip Forecasting Accuracy

by Paul Kasriel
The Northern Trust Company
Economic Research Department - Daily Global Commentary

Copyright © 2011 Paul Kasriel
Paul joined the economic research unit of The Northern Trust Company in 1986 as Vice President and Economist, being named Senior Vice President and Director of Economic Research in 2000. His economic and interest rate forecasts are used both internally and by clients. The accuracy of the Economic Research Department's forecasts has consistently been highly-ranked in the Blue Chip survey of about 50 forecasters over the years. To that point, Paul received the prestigious 2006 Lawrence R. Klein Award for having the most accurate economic forecast among the Blue Chip survey participants for the years 2002 through 2005.

The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The Northern Trust Company does not warrant the accuracy or completeness of information contained herein, such information is subject to change and is not intended to influence your investment decisions.

Paul L. Kasriel Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules