Best of the Week
Most Popular
1. Gold Final Warning: Here Are the Stunning Implications of Plunging Gold Price - P_Radomski_CFA
2.Fed Balance Sheet QE4EVER - Stock Market Trend Forecast Analysis - Nadeem_Walayat
3.UK House Prices, Immigration, and Population Growth Mega Trend Forecast - Part1 - Nadeem_Walayat
4.Gold and Silver Precious Metals Pot Pourri - Rambus_Chartology
5.The Exponential Stocks Bull Market - Nadeem_Walayat
6.Yield Curve Inversion and the Stock Market 2019 - Nadeem_Walayat
7.America's 30 Blocks of Holes - James_Quinn
8.US Presidential Cycle and Stock Market Trend 2019 - Nadeem_Walayat
9.Dear Stocks Bull Market: Happy 10 Year Anniversary! - Troy_Bombardia
10.Britain's Demographic Time Bomb Has Gone Off! - Nadeem_Walayat
Last 7 days
Tory Leadership Contest - Will Michael Gove Stab Boris Johnson in the Back Again? - 19th May 19
Stock Market Counter-trend Rally - 19th May 19
Will Stock Market “Sell in May, Go Away” Lead to a Correction… or a Crash? - 19th May 19
US vs. Global Stocks Sector Rotation – What Next? Part 1 - 19th May 19
BrExit Party EarthQuake Could Win it 150 MP's at Next UK General Election! - 18th May 19
Dow Stock Market Trend Forecast 2019 May Update - 18th May 19
US Economy to Die a Traditional Death… Inflation Is Going to Move Higher - 18th May 19
Trump’s Trade War Is Good for These 3 Dividend Stocks - 18th May 19
GDX Gold Mining Stocks Fundamentals Update - 17th May 19
Stock Markets Rally Hard – Is The Volatility Move Over? - 17th May 19
The Use of Technical Analysis for Forex Traders - 17th May 19
Brexit Party Set to Storm EU Parliament Elections - Seats Forecast - 17th May 19
Is the Trade War a Catalyst for Gold? - 17th May 19
This Is a Recession Indicator No One Is Talking About—and It’s Flashing Red - 17th May 19
War! Good or Bad for Stocks? - 17th May 19
How Many Seats Will Brexit Party Win - EU Parliament Elections Forecast 2019 - 16th May 19
It’s Not Technology but the Fed That Is Taking Away Jobs - 16th May 19
Learn to Protect your Forex Trading Capital - 16th May 19
Gold Ratio Charts Offer The Keys to the Bull Market - 16th May 19
Is Someone Secretly Smashing the Stock Market at Night? - 16th May 19
Crude Oil Price Fails At Critical Fibonacci Level - 15th May 19
Strong Stock Market Rally Expected - 15th May 19
US China Trade Impasse Threatens US Lithium, Rare Earth Imports - 15th May 19
Gold Mind Reader's Guide to the Global Markets Galaxy: 'Surreal' - 15th May 19
Trade Wars and Other Black Swan Threats to Your Investments - 15th May 19
Our Long-Anticipated Gold Momentum Rally Begins - 15th May 19
Defense Spending Is Recession Proof - Defense Dividend Stocks - 15th May 19
US China Trade Issues Will Drive Market Trends – PART II - 14th May 19
The Exter Inverted Pyramid of Global Liquidity Credit risk, Liquidity and Gold - 14th May 19
Can You Afford To Ignore These Two Flawless Gold Slide Indicators? - 14th May 19
As cryptocurrency wallets become more popular, will cryptocurrencies replace traditional payments? - 14th May 19
How US Debt Will Reach $40 Trillion by 2025 - 14th May 19
Dangers Beyond a Trade War with China - 14th May 19
eBook - Greatest Tool for Trading? - 14th May 19
Classic Pitfalls for Inexperienced Traders - 14th May 19
Stock Market S&P 500 Negative Expectations Again - 13th May 19
Why Rising Living Standard in China Offers Global Hope - 13th May 19
Stock Market Anticipated Correction Starts On Cue! - 13th May 19
How Chinese Trade Issues Will Drive Stock Market Trends - 13th May 19
Amazon SCAM Deliveries for Fake Verified Purchaser Reviews "Brushing" - 13th May 19
Stock Market US China Trade War Panic - Video - 13th May 19
US Stock Market Leading Macro Economic Indicators Update - 12th May 19
SAMSUNG - BC94.L - Investing in AI Machine Intelligence Stocks - 11th May 19
US Increases Trade Tariffs Against China – Stock Markets, Gold, and Silver - 11th May 19
Who Has More To Lose In A No Deal Brexit? - 11th May 19
Gold at $1,344 Will Start Real Fireworks on the Upside - 11th May 19
Make America’s Economy Great Again - 10th May 19
Big US Stocks’ 2019 Fundamentals - 10th May 19
Stock Market US China Trade War Panic! Trend Forecast May 2019 Update - 10th May 19
Stock Market Shake-Out Continues – Where Is The Bottom? - 10th May 19

Market Oracle FREE Newsletter

U.S. House Prices Analysis and Trend Forecast 2019 to 2021

When Will US Debt Hit the Wall?

Interest-Rates / US Debt Jun 25, 2015 - 03:15 PM GMT

By: DeviantInvestor

Interest-Rates

As I see it, the following are true:

  1. Debt is increasing far more rapidly than growth in the underlying economies that must support that debt. Although this is also true in Japan, the UK, and Europe, I’ll focus on the US.
  2. Revenue is increasing but less rapidly than debt. This is a problem.
  3. There will come a time when the interest payments on exponentially increasing government debt will exceed what the economy can support. Call that point “hitting the wall.”
  4. Higher interest rates will cause the US economy to “hit the wall” sooner. Lower interest rates merely delay the “day of reckoning.”

WHEN?

Examine the log scale graph of US government revenues for the past 30 years.  The exponential rate is about 4.6% per year.

Total official US debt is over $18 Trillion but some of that is “Intragovernmental debt” – such as debt to the social security program.  The remaining portion that is actually owed to pension funds, individuals, sovereign governments etc. is about $13 Trillion.  It is increasing rapidly, thanks to out of control spending far in excess of revenues.

Date                        Public Debt          Intragovernmental          Total

                                 In $ Trillions                    Debt                     Debt

9/30/2008                     $5.81                         $4.22                     $10.03

9/30/2014                   $12.78                         $5.04                     $17.82

Rate of Increase          14%                              3%                         10%

(annual)

It seems likely that revenues will decline in the coming recession, while expenses will probably increase for social programs, bailouts, and another war.  Assume revenues optimistically increase at the historical average of 4.6% per year and public debt only increases at 14% per year.  A more likely scenario is lower revenue and higher debt increases, for many reasons, not discussed here.

When does an economy “hit the wall?”

  • When interest expense exceeds revenues? Yes, but probably well before that.
  • When confidence in the currency and/or government fails?
  • When total interest expense exceeds say 1/3 of government revenue? Yes, or perhaps well before that point.

We don’t know.  Assume we delay “hitting the wall” until interest expense equals 1/3 of revenue.  But that is dependent upon the total interest expense which is determined by the blended interest rate.

Year            Estimated Revenue      Estimated Public         Implied MAX

                                                            Debt                             Interest Rate

2015                      $3.16                       $14.6                                   7.2%

2020                      $3.96                       $28.1                                   4.7%

2025                      $4.95                       $54.0                                   3.0%

2030                      $6.20                     $104.0                                   2.0%

Assuming that revenue increases 4.6% per year, public debt increases 14% per year, and that a maximum of 1/3 of revenue can be used for paying interest, the blended interest rate in 2030 cannot exceed 2%.  Washington, we have a problem!

Much can happen between now and 2030 and these exponential projections are unlikely to be realized.  The consequences of more QE, uncontrolled spending, more wars, and a weakening economy could be worse or better.

Regardless, if the maximum acceptable interest rate is 2% in 2030, or a few years before or after, there is a problem!

WHAT TO DO?

  1. Reduce spending. I’ll believe it when I see it.
  2. Increase taxes. Why use a Band-Aid to fix a broken leg?
  3. Hyperinflation:  Is the “cure” worse than the disease?
  4. Vote in new politicians. Really?  You actually believe that?
  5. Your call. What do you think?

This tiny exercise tells me that western economies are accelerating toward a wall, there are only a few years or perhaps a decade or two remaining before a major reset must occur, and that the time for delusional thinking is nearly gone.

What have you done to prepare for when one or many western economies “hit the wall?”  Gold and silver might be better answers than devaluing currencies, overpriced bonds, or levitated stocks.

Share your opinions in a comment and let others, including myself, learn from your thoughts.

GE Christenson aka Deviant Investor If you would like to be updated on new blog posts, please subscribe to my RSS Feed or e-mail

© 2015 Copyright Deviant Investor - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Deviant Investor 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