Budget

Debt Wish

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Debt becomes him.

How significant is the risk that the U.S. will eventually hit a debt crisis? Earlier this week, I noted a new paper by Arnold Kling guessing that it's at least somewhat likely that the U.S. will experience a debt crisis sometime in the next two decades. Yesterday, the International Monetary Fund released its own report on the question. The gist, from The Washington Post, is that America is reaching toward the limits of what investors are likely to put up with:

The IMF estimated a series of probabilities regarding the amount of increased debt a country might be able to sustain without hitting its projected point of no return.

In the case of the U.S., the fund said the odds were roughly three out of four that the country could increase its total debt to some degree without being penalized by investors—logical considering that the debt is steadily increasing and interest rates remain low and steady.

However that probability falls to an even 50-50 if the amount of new borrowing were to exceed fifty percent of GDP—or about $7 trillion given the current, $14 trillion size of the U.S. economy.

That might seem like plenty, except for the fact that under current Office of Management and Budget projections the "fiscal space" may fast disappear. The OMB projects total U.S. debt to jump by about $4.7 trillion in the next five years, leaving little room after that.

Better than expected growth, of course, could add fiscal "space," but another recession could shrink it.

In other words, despite some anxiety, investors don't seem too worried about U.S. debt today. But at the point when investors become more worried, might it be too late? As Kling cautioned in his paper, without some no-kidding signals that the U.S. is working seriously to reduce its debt load, "investor expectations will change at some point. That change in market perception is likely to be swift and severe."

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  1. While Charles Bronson may be gone, his worthy protege for badassedness lives on in his own film.

    1. Here down in Orlando, FL the county official in charge of weights and measurements certification is named, I shit you not, Charles Bronson! If you pump your gas anywhere near Disney World you will see a big certification sticker on the pump with Mr. Death Wish’s name on it!

      He’s been in that same office for years and I still giggle every time I see his certification stickers!

  2. without some no-kidding signals that the U.S. is working seriously to reduce its debt load, “investor expectations will change at some point. That change in market perception is likely to be swift and severe.”

    Saying “Really, I’m going to quit drinking; I’m going to clean myself up and get a job.” won’t work forever.

    On a somewhat related note, I had a very interesting conversation with a nice couple from Switzerland the other evening; they are convinced the Euro zone will fall apart.

    1. they are convinced the Euro zone will fall apart.

      As soon as the Germans get tired of funding early retirement for the Greeks and extended vacations for the Spanish, it will.

  3. ^THIS
    ..is what i try to pound into everyone’s head that will listen.
    Fuck der Kultur wars; nothing, but nothing, is more important for our childrens’ future.

    1. Teh article not the other gulf blow up….

  4. I think the psychology at work with US debt is no one is willing to be the first volunteer – to not show up at the bond auction.

    The question isn’t appetite for US debt, its when it is no longer in some big outfit’s interest (by big I mean a cash-loaded sovereign, like China or Saudi) to keep propping up our borrowing. Our biggest creditors are – to some extent – not investing in US “assets’ with these financings, but world stability in a way.

    1. In fact this has already happened. China has deemed U.S. Treasuries to no longer be top level investment grade, and they’re no longer buying them. I think they’re now out of the market for our debt for good.

      That’s a big part of the reason why the Fed is now going to have to engage in another big round of quantitative easing in order to keep the interest rates artificially low.

  5. The welfare state went one way, and reality went its.

  6. Its pretty clear that sooner or later they are going to get hit!

    http://www.real-privacy.ua.tc

  7. So we have until the budget deficit hits 50% of GDP and then things turn bad in a hurry.

    Okay, then what? Because we will hit that threshold.

    1. Just walk away.

    2. I hear South America is nice…

  8. The day I take economic reporting from the WaPo seriously, is the day I sell my house for magic beans. I don’t even need to RTFA or the IMF report. If I want someone to blow smoke up my ass, I’ll watch Dick Fuld’s Congressional testimony.

  9. It used to be that Democrats wanted to spend and have deficits. Republicans didn’t. That made the Republicans look mean. So they decided to have tax cuts and deficits too.
    Now you have neither party to put forward the radical, wild proposition that income in some way at some times, must be somewhat realted to outgo.
    During the only surplus in 40 years, you had the tailwinds of the peace dividend, and the tech bubble.
    You now have headwinds of declining ratios of population to support the oldsters. I find it hard to believe that our system will be able to apportion the pain that is coming.

  10. We don’t have to have a debt crisis. We don’t have to keep spending money we don’t have. We don’t have to act like children with no conception of consequences.

    Change or fade into irrelevance. It’s that simple.

    1. Hard work pays off over time, but lazy pays off right now!

  11. …sometime in the next two decades… [insert forgettable prediction here]

    I think that explains Keynesian thinking anyway.

  12. In other words, despite some anxiety, investors don’t seem too worried about U.S. debt today.

    True, as were the following at various points:

    In other words, despite some anxiety, investors don’t seem too worried about mortgage backed securities today.

    In other words, despite some anxiety, investors don’t seem too worried about Lehman Brothers today.

    In other words, despite some anxiety, investors don’t seem too worried about Bear Stearns today.

    In other words, despite some anxiety, investors don’t seem too worried about Fannie Mae and/or Freddie Mac today.

    In other words, despite some anxiety, investors don’t seem too worried about internet stocks today.

    1. In other words, despite some anxiety, investors don’t seem too worried about the FX market today.

      http://www.zerohedge.com/artic…..ent-557198

  13. Debt Crisis, Schmedt Crisis. Let’s party on, churn up the printing presses to play our crditors like the chumps they are; and make sure you have a wheel barrel to carry your cash to the stor to buy a loaf of bread!

  14. Baby Bronson: “Hey ma, how about a cookie?”

    Mama Bronson: “No dice.”

    Baby Bronson: “This ain’t over.”

  15. However that probability falls to an even 50-50 if the amount of new borrowing were to exceed fifty percent of GDP?or about $7 trillion given the current, $14 trillion size of the U.S. economy.

    Seriously, anyone who believes there is a 50/50 chance that there would still be a market for US debt if we were adding 50% of our GDP to the national debt every single year is a complete and utter idiot, with absolutely no comprehension of history.

  16. It is true by the time the invester see that there is a problem it will be to late and much harder to get out of debt.

    For anyone looking to do it on there own I have a speical deal going on my page right now come see it at debttowealth.com

  17. US debt has never gone down since 1969.

  18. US debt has never gone down since 1969. So who among the past presidents is responsible for borrowing the most?

  19. seriously the US is trying to find some means to reduce it dept problem. the stimulus plans to create jobs and saving investors by bailing out some companies has done little help. Consumers should be very careful on their expenditures and if possible spend the hard earned money wisely. Financial turmoil has affected all parts of the world and if some genius financial professionals will find ways to solve the problem I’m pretty sure things will back to where we were before.

  20. Money Market is a very good sports arena. You have to lay down your cards in full battle gear. The US has to double check its expenditures and credit status as to the GDP. If things will continue surely china will surpass US as the next Giant Economy in 2020

  21. i’s very good ,I LIKE IT

  22. debt whis ~~YREFDHFDD

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