Treasury Bonds - What's Not to Like?

[sailor]

Quote:

Originally Posted by Mulligan He said the debt is slightly higher than GDP. That is equivalent to a persons mortgage debt slightly exceeding their annual income. In other words, no big deal. That made me think in terms of my mortgage as it is about 150% to current income and I live just fine under that parameter. There, of course, was no counter point to his own argument. What would it be? Does this mean economically speaking we could carry 200% plus, since I know in my budget I could? I was always curious about that line of thinking as I really hadn't been exposed to it before. Aside from interest rate spike exposure and foreigners not buying the debt, what else would be the risk in this thinking?

I think better analogy would be a ratio of debt to US tax revenue.
That does not look as rosy: let's say 16 trillion over 2.5 trillion, about 640%

[Mulligan]

Quote:

Originally Posted by sailor I think better analogy would be a ratio of debt to US tax revenue. That does not look as rosy: let's say 16 trillion over 2.5 trillion, about 640%

Now to a lay person like me, your analogy makes more sense. I wonder why it is always spoken in terms of debt to GDP, instead of tax revenue? I don't think I have ever even seen it reported or discussed in that manner though.

[imoldernu]

Quote:

Originally Posted by Khufu Complete nonsense, of course. Here's a comparison of the CPI from the Bureau of Labor Statistics against the Billion Price Index maintained by MIT: Looks like they line up pretty well to me: Taken from Krugman: http://krugman.blogs.nytimes.com/201...l-these-years/

Well, there are charts, and there are charts.

Shadow Government Statistics - Home Page
Some of the "sneaky things " are Hedonic and quality adjustments, geometric weighting, and methodology changes in the years 1980 and 1990.

[clifp]

Quote:

Originally Posted by Mulligan I have always just been a simplistic government debt alarmist type person. But the someone recently I read pooh poohed the concern in a way I really hadn't thought about. He said the debt is slightly higher than GDP. That is equivalent to a persons mortgage debt slightly exceeding their annual income. In other words, no big deal. That made me think in terms of my mortgage as it is about 150% to current income and I live just fine under that parameter. There, of course, was no counter point to his own argument. What would it be? Does this mean economically speaking we could carry 200% plus, since I know in my budget I could? I was always curious about that line of thinking as I really hadn't been exposed to it before. Aside from interest rate spike exposure and foreigners not buying the debt, what else would be the risk in this thinking?

Well that is very flawed analogy. Is that 150% ratio your net or gross income? Lets assume this is net and between payroll, state, and federal taxes you pay 1/3 of your income on taxes. So the actual ratio of debt to after tax income is 225%.

The government has similar problem it is net income that counts not gross revenue. The debt to GDP ratio is a bit over 100%. The Federal government generously allows its citizen to keep 80+% of the revenue we generate to pay our mortgage, put food on the table and also lets state and local governments collect another 15% of so. So the ratio of debt to net income is actually over 500%. For FY 2013 it looks like the final number will 17.2 trillion in debt and 2.71 trillion in revenue or a ratio of 634%. Now at an average interest rate of say 3% that is sill less than 20% of our revenue goes to pay interest. But if interest rates go up another 2 or 3% pretty soon 40% of the government revenue go to interest and that does seem to be a tipping point.

[HFWR]

Quote:

Originally Posted by imoldernu Well, there are charts, and there are charts. Shadow Government Statistics - Home Page Some of the "sneaky things " are Hedonic and quality adjustments, geometric weighting, methodology changes in the years 1980 and 1990, and ignoring food and energy prices in calculations of Social Security adjustments.

Well, one can (and we have) argue that, but there's nothing particularly "sneaky" about it. It's not a secret.

[Mulligan]

Quote:

Originally Posted by clifp Well that is very flawed analogy. Is that 150% ratio your net or gross income? Lets assume this is net and between payroll, state, and federal taxes you pay 1/3 of your income on taxes. So the actual ratio of debt to after tax income is 225%. The government has similar problem it is net income that counts not gross revenue. The debt to GDP ratio is a bit over 100%. The Federal government generously allows its citizen to keep 80+% of the revenue we generate to pay our mortgage, put food on the table and also lets state and local governments collect another 15% of so. So the ratio of debt to net income is actually over 500%. For FY 2013 it looks like the final number will 17.2 trillion in debt and 2.71 trillion in revenue or a ratio of 634%. Now at an average interest rate of say 3% that is sill less than 20% of our revenue goes to pay interest. But if interest rates go up another 2 or 3% pretty soon 40% of the government revenue go to interest and that does seem to be a tipping point.

I was using gross, but I get to keep about 80% of mine, unlike the government. You bring up a very worrisome point though to me. People keep referring to "when interest rates go back to historical normal levels I will purchase some bonds". Well that 2-3% increase you referred to is still within range of "normal rates". I do not see how the government could function properly paying out 40% of budget on interest. Makes you wonder if rates will really go much higher, but if they did maybe it will not be a very pleasant experience for all down the road.

[Katsmeow]

Quote:

Originally Posted by Mulligan Now to a lay person like me, your analogy makes more sense. I wonder why it is always spoken in terms of debt to GDP, instead of tax revenue? I don't think I have ever even seen it reported or discussed in that manner though.

The thing is that as tempting as it is to compare the federal budget to a household budget, they aren't the same. So, those comparisons actually aren't all that useful and break down.

Let me google that for you

[haha]

Quote:

Originally Posted by Mulligan I have always just been a simplistic government debt alarmist type person. But the someone recently I read pooh poohed the concern in a way I really hadn't thought about. He said the debt is slightly higher than GDP. That is equivalent to a persons mortgage debt slightly exceeding their annual income. In other words, no big deal.

Interesting POV, and this area gets too murky for me very quickly-BUT- GDP is not available to pay government expenses, and thus IMO not comparable to a person's mortgage and his income.

Government has only it's revenues, in fact only the portion of those revenues that is not very tightly committed to other purposes, to pay debt service. How much luck would the government have if it suspended welfare, military pay and pensions, federal health and retirement benefits, federal worker pay, NSA, FBI etc etc etc?

The analogy you read I cannot quite see as being accurate.

My cautious attitude toward securities of all types at this time is mostly due to a different scent on the wind. The 10 year government bond does not essentially fly from about 1.7% to 2.7%+ without something having changed. That is a massive change in a rate that has been quite steady in the prior recent past. The move may be over, or may not be and I have no way to know.

People may say, so what? To me there is big so what. Last April or may $100,000 invested in 10 years treasuries would have earned about $1700/year. Now $100,000 would earn $2700. Only difference is 3 0r 4 months between the two commitments.

Eso no me gustaria.

Ha

[clifp]

Quote:

Originally Posted by Mulligan I was using gross, but I get to keep about 80% of mine, unlike the government. You bring up a very worrisome point though to me. People keep referring to "when interest rates go back to historical normal levels I will purchase some bonds". Well that 2-3% increase you referred to is still within range of "normal rates". I do not see how the government could function properly paying out 40% of budget on interest. Makes you wonder if rates will really go much higher, but if they did maybe it will not be a very pleasant experience for all down the road.

Yup that is the $64 trillion question. I really do think the 40% is near the tipping point. I bought my first house in 1983 a couple of year out of school, with one of my college roommates. Both of our net income was a bit over 25K at the time and the house cost 153K so our debt to income ratio was 300%. Now today that would manageable. However back than with 10% down (borrowed from parents) the only way we could swing it was with Graduate Payments loan. (The predecessor to the option ARM and other creative mortgages.) The assumption was that as young engineers in a time of high inflation our incomes would rise rapidly. So each year for the first 5 years our payments would increase. But for 4 years our payments did not even cover the interest on the loan but rather went further in debt.

The kicker was the interest rate 13.75%! I just calculated that our interest coverage to income was 40% (300%*13.75%). As it turns everything worked out as planned. We took in a couple of roommates and had a tame frat house, inflation cause our salaries to rise and the value of the house to rise. With 3 years we had enough equity to qualify for a conventional ARM and rode the lower interest rates down throughout the 80s and early 90s. But looking back there were so many things that could have gone wrong leaving us and the bank with an underwater mortgage.

So it is possible that Uncle Sam could get bailed out by higher inflation driving up higher tax revenue. Obviously they could raise taxes but realistically 20% is tough sell to the American people I think 25% of GDP is the actual upper limit.

[Animorph]

Japan is way into this heavy debt, can't afford it if interest rates rise, but let's create inflation anyway thing. Keep an eye on them and we might have some ideas about what to do/not to do/try to avoid altogether.