Federal Debt Service
With the average interest rate on
federal debt declining, how can we have a fiscal crisis? Clearly there is lots of capital chasing the
government debt. When the average interest rate starts to rise, it would indicate
a rising fiscal risk. In addition, the
debt service ratio is not out of line with the recent past and not anywhere
near danger levels.
Average Treasury Interest Rate…Updated Jun’09
Number 1 fiscal crisis indicator,
Treasury Average Interest Rate, Jun’09 = 2.7%
Federal Debt Service Ratio (Danger Levels 35%+ )…Updated
Nov’09
US Debt Service Fiscal Year, Nov’ 09
= 383B Total
Interest Expense By Month
Tax Revenue Annualized, Sep ’09 =
2211B Total Federal Taxes
Collected Quarterly
US DSR = 383/2211 = 17% (Japan
16.5%)
If this rate of change chart crosses
0 and starts rising, then a fiscal crisis is close:
Fiscal Crisis Indicators
1) Japanese GB yields rising [Aug '08 10 year 1.42%]
2) UK GB yields rising (UK and Japan default first and possibly hyperinflate – they are the canaries in the coal mine)
3) Rising Average US Treasury Interest Rates [Aug’08 10yr 3.9%]
4) Gov’t DSR above 35%, Canada broke at 35%, Britain in 1939 at 40%+
5) Gov’t Debt to GDP ratio above 180%
6) Gold rising as ability to service debt is questioned, oil may be falling due to negative GDP
7)
Available Savings & Stock Market Cap
insufficient to fund deficit
(Japan had high savings, long period of
adjustment and external surplus US will be lacking although US savings rate is
increasing while Japan’s is declining)
Treasury Monthly Statement
http://www.fms.treas.gov/mts/MTS.xls
http://www.fms.treas.gov/mts/index.html
Rolling 12 months
Change in Tax Revenue…Updated Apr’09
Good recovery indicator.
Fiscal policy is at
best a mitigating or cushioning factor.
Monetary policy is the preferred method.
Unfortunately, monetary policy has failed at this time.
As bailouts and deficit spending increases, there comes a point where the federal debt service is so high that they have no choice but to print money ie. hyperinflation. Currently, US is not near this point but I believe in the next 10 years it may come to be.
US is farther from hyperinflation versus Japan. US DSRs are lower and US savings rate is increasing not decreasing. As the mild deflation takes hold in US in the next few years, the finance rate will fall along with government bond yields. Arguably, Japan is still some time from a hyperinflation as its interest rates are low. Although recent 2009 Japan data show that the interest payments are rising rapidly.
Japan (2008) vs US:
Japan interest
payments to debt ratio: 9.5T
yen/ 547T yen = 1.74% (also average interest rate on debt - in $
approx. 95 $B / 5.47 $T )
National debt
service to debt : 21T
/ 547T =
3.8% (one
theory I have is that they are buying back higher interest loans and issuing
new low interest gov't bonds.)
Also....
interest payments to tax revenue: 9.5
T / 57.5 T = 16.5% (peaked at 22% in 1999)
US interest
payments to debt (Jun’2009): 320 $B /
7100 $B = 4.5% (This
will come down as current T bills are financed at 0%. In the future a 0%
fed policy will improve this further. TIPS not incl.)
Interest
payments to tax revenue: 320
$B / 2377$B = 13.5%
Federal
Tax Collection
As of Q1’09, tax collections are falling at 10% rate yr over yr.
Total
Federal Taxes Collected Quarterly
Federal
Interest
Federal debt service is not bad compared to Japan. It's currently about 13.5%. Japan is at 16.5%.
For 2009, Federal interest payments are falling year over year (probably start rising next year).
Federal
Interest Payments Growth
Interest
Expense and Average Interest Rate Chart
Federal Debt
Federal debt is rising at a record rate. There is other federal debt but it doesn't pay interest as it is owed to other parts of federal government social security, etc.
Programs here will have benefits cut and premiums increased to cover.
As of May 2009, Breakdown of
Federal Public Debt shows short term orientation:
T Bills 29%
T Notes 46%
T Bonds 9%
TIPS 7.5%
Nonmarket 8.4%
Federal,
State and Local Tax Collection
All Government Receipts Growth
State Tax Collections Growth Annual
Debt to GDP Ratio
See other countries… US at 65% of GDP far from Japan.
https://www.cia.gov/library/publications/the-world-factbook/rankorder/2186rank.html
Hyperinflations
and Deflations
Public debts are not necessarily inflated away. America, Britain (never defaulted on its debt), Canada, Belgium, and Japan (so far) haven’t inflated away their debts.
Other countries did inflate away but only after a war and tax collection was
weak: Argentina, Germany (1920s), and Russia. British economist Ralph Hawtrey
wrote “It is after depression and unemployment have subsided that
inflation becomes dangerous.”
Unemployment did rise after the hyperinflation in Weimar Germany but not as much as deflation in 1930s.
However, there is no certainty as to how the debt will be handled so CPI indicator must be watched.
Deflation Threats Debt/GDP Hyperinflations
(after crisis start) (after crisis start)
US Q1’2009 64.5% (Fed, State &Local)
Germany 1929
US 1929 Germany 1921
US 1945 120% Russia 1991
Britain 1939 178% Argentina 1990s
Belgium 1990s 100%+ Brazil 1990s
Canada 1990s 100%+
Japan 2001 178%
German
Weimar Experience
The Lost Science of Money by Stephen Zarlenga,
writes that in Schacht's (Hjalmar Schacht, the currency commissioner for the Weimar
Republic), 1967 book The Magic of Money, he "let the cat out of the bag,
writing in German, with some truly remarkable admissions that shatter the
'accepted wisdom' the financial community has promulgated on the German
hyperinflation." What actually drove the wartime inflation into
hyperinflation, said Schacht, was speculation by foreign investors, who would
bet on the mark's decreasing value by selling it short.
Of course the setup for this was war debts from WW1
and to a lesser extent Treaty of Versailles reparations. Foreign investors (US and others) owned much
of this debt.
Unemployment in German Reich shows it rising to 10% (1926) after the hyperinflation (ended 1923), but the devastating 29% level did not occur until 1932 (US and Canada also experienced 25%). The radical party was polling below 7% in 1920s until 1930-32 when they jumped dramatically to 37%.
