Risk of excessive gov debt/obligations

[Gone4Good]

Quote:

Originally Posted by MasterBlaster It may be manageable now, as you post. But all those poorly funded future entitlements are the concern. Depending on what happens, that debt to GDP could get way too large causing way big problems. Similarly large extra taxes to fund it all could cause big problems with the economy. Hence the OP's concerns about what could (possible) happen and how to protect oneself.

It helps to put things in perspective and to also think about what the upper limit of debt a modern economy with it's own currency can shoulder. In that regard we might choose Japan as a test case to compare.

Currently Japan's Debt/GDP is about 230%. The graph below shows the CBO projections of the same ratio for the U.S. going out to 2026 where it reaches 86%.

Notwithstanding the fact that Japan's debt is nearly three times as large as ours it's government currently issues 10-year bonds at a yield of (0.12%) . . . effectively having lenders pay the government to borrow. There's no sign of a debt crisis in Japan which means that 230% debt / GDP is not an upper limit.

None of this is to say that we should take our fiscal situation lightly but it does strongly suggest that there is no reason for fear.

[scrinch]

Quote:

Originally Posted by petershk First is that the absolute debt number is fairly meaningless. Sorta like I used to buy milk for 99 cents but now it's 3.99.

Meaningless unless you're retired and your budget only allows for spending $2/week for milk. You used to be able to buy a half gallon of milk, but now you can afford only a pint.

Quote:

Originally Posted by cyber888 The United States Government will never go Bankrupt, because we print our own money .. and yeah, that's the almighty US Dollar, which is still a de facto international currency. And the Dollar is getting so much stronger against other currencies that the US can print another $10 Trillion more and it would not really matter if they print more money to pay for stuff.

If they print another $10 trillion and double the supply of dollars out there, doesn't that make each dollar in your portfolio worth less? Well, that's what happened with the Roman denarius anyway, the de facto Mediterranean "world currency" when they just started minting more of them to pay government debts. Its value relative to things of intrinsic value like bread and wine and labor plummeted.

[scrinch]

Quote:

Originally Posted by Gone4Good Notwithstanding the fact that Japan's debt is nearly three times as large as ours it's government currently issues 10-year bonds at a yield of (0.12%) . . . effectively having lenders pay the government to borrow.

It is apparently a viable debt load now, but what happens when the borrowing rate goes back up to 2% or 3%? As they replace those bonds over a 10 year period, their interest payments will increase by a factor of 10 or more, and that's assuming that no more debt is taken on. Or are bond yields permanently this low?

[Gone4Good]

Quote:

Originally Posted by scrinch It is apparently a viable debt load now, but what happens when the borrowing rate goes back up to 2% or 3%? As they replace those bonds over a 10 year period, their interest payments will increase by a factor of 10 or more, and that's assuming that no more debt is taken on. Or are bond yields permanently this low?

It all depends on other factors. A long-run sustainable government debt load is generally viewed this way . . .

Sustainable Debt to GDP = (primary deficit)/(nominal growth rate of GDP - nominal interest rate on government debt)

Tell me what all the other numbers are and I can solve for X.

But even without filling in all of the blanks, you can gather from the formula that interest rate increases driven by inflation have zero impact on sustainable debt. So why interest rates rise is more important than whether interest rates rise.

[nash031]

Quote:

Originally Posted by scrinch Meaningless unless you're retired and your budget only allows for spending $2/week for milk. You used to be able to buy a half gallon of milk, but now you can afford only a pint. If they print another $10 trillion and double the supply of dollars out there, doesn't that make each dollar in your portfolio worth less? Well, that's what happened with the Roman denarius anyway, the de facto Mediterranean "world currency" when they just started minting more of them to pay government debts. Its value relative to things of intrinsic value like bread and wine and labor plummeted.

Protect your portfolio from inflation by not keeping everything under the mattress, but that doesn't really enter into the discussion other than a big "duh".

In the case of the OP, his pension is COLA-adjusted by CPI each year, so unless that changes (and they tried once, but were summarily shouted down), it's less of a concern for him.

[Senator]

Quote:

Originally Posted by Gone4Good It all depends on other factors. A long-run sustainable government debt load is generally viewed this way . . . Sustainable Debt to GDP = (primary deficit)/(nominal growth rate of GDP - nominal interest rate on government debt) Tell me what all the other numbers are and I can solve for X. But even without filling in all of the blanks, you can gather from the formula that interest rate increases driven by inflation have zero impact on sustainable debt. So why interest rates rise is more important than whether interest rates rise.

I think some of the other numbers need to be how much the other world currencies are being printed. If other countries print money faster than the USA, we are still good.

[Fermion]

Quote:

Originally Posted by scrinch Meaningless unless you're retired and your budget only allows for spending $2/week for milk. You used to be able to buy a half gallon of milk, but now you can afford only a pint.

Which is perfectly ok since the manufacturer will have changed the form factor of the milk container to make the pint look like a gallon.

[Which Roger]

If the US government does get in over its head with debt, I don't think the outcome would be the most direct one - some sort of default. Rather, it would manifest itself in other ways: Higher taxes, higher inflation, slower economic growth, recessions, etc. In this scenario, non-government assets (e.g., stocks) would be affected as much or more than treasury bonds, government pensions, etc.

[CaliforniaMan]

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Originally Posted by Gone4Good +1 I'd add that there's a lucrative industry dedicated to ginning up these kinds of fears. People sell books, investments (chiefly, but not only, gold), ad space on T.V., newsletters, even actual guns and bullets, all by touting various notions of societal collapse. It doesn't have to be true to ring the cash register. Mostly it's just hype designed to move money from your pockets to theirs. The best way to protect yourself is to ignore all of it.

+1
Very good advice. There are plenty of things to worry about, this is not one of them. I have been hearing this kind of stuff since the early 70s. People can always make a good sounding argument that the sky is falling, and since there is money to be made doing it, they will.

That is not to say there is not risk. There is, and we don't know what it is. That is why we stay diversified. Choose the mix that you are happy with and enjoy life. The end of the world will come, but in all likelihood, your death will precede it. So be happy!

[VFK57]

1. If Feds are going to increase rate, how much budget deficit it is going to add up and where it is going to come from?
2. Do you know any top level economist who thinks that our Debt could be repaid without inflation or with moderate inflation of 1.5-2% under current economic conditions?
3.Could monetizing of our Debt trigger hyper inflation (as China, Russia, Japan, some Middle Eastern countries are selling our Debt)?
4. Most of us know well that "easy money" policies moved stock market much higher but what the Wall Street reaction would be on actual rates raising to normality?
5. Do you know major foreign buyers of our Treasury Notes and how they compare with internal buyers (Feds, many US major Banks, private citizens)?

[Fred123]

The debt servicing ratio to GDP is a whopping 1.24% as of 2015 -- the lowest it's been since about 1974 (see https://research.stlouisfed.org/fred...es/FYOIGDA188S). Note that the inflationistas/gold bugs/sky is falling folks have been predicting fiscal doom for close to 10 years now, and yet it never seems to materialize.

[AllDone]

It also might be worth pointing out that the US government has been in debt for all but about 18 months of its 227 year existence.

[petershk]

Quote:

Originally Posted by Fred123 The debt servicing ratio to GDP is a whopping 1.24% as of 2015 -- the lowest it's been since about 1974 (see https://research.stlouisfed.org/fred...es/FYOIGDA188S). Note that the inflationistas/gold bugs/sky is falling folks have been predicting fiscal doom for close to 10 years now, and yet it never seems to materialize.

Yup.
And the fiscal disaster that DID happen (housing collapse -> bank crisis) wasn't well predicted, was it .

In 2007 we could just as easily said debt is too high, pensions are at risk and then cashing out pensions to go all in the market would not have been the safe decision

Future is hard to predict so I don't worry that much about what I can't control.

Sent from my HTC One_M8 using Early Retirement Forum mobile app

[Fred123]

Quote:

Originally Posted by petershk Yup. And the fiscal disaster that DID happen (housing collapse -> bank crisis) wasn't well predicted, was it . In 2007 we could just as easily said debt is too high, pensions are at risk and then cashing out pensions to go all in the market would not have been the safe decision Future is hard to predict so I don't worry that much about what I can't control. Sent from my HTC One_M8 using Early Retirement Forum mobile app

Well, certainly there were some indicators that household debt servicing costs were worrisome (see https://research.stlouisfed.org/fred2/series/TDSP). And people often make the mistake of equating government and household debt, which are two different beasts.

[VFK57]

Are Texans foolish or first to recognize dangers we face? Texas laying the groundwork for electronic gold-based money - Business Insider

[CaliforniaMan]

And don't forget the last time that we had a decade, actually 11 years, of budget surpluses. That was 1920 through 1930. How well did that turn out?

[Markola]

Maybe the good old Serenity Prayer will help the OP:

Grant me the strength to change the things I can;
Acceptance of the things I can't;
And wisdom to know the difference between a sharknado and an arachnoquake.

[audreyh1]

Quote:

Originally Posted by VFK57 Are Texans foolish or first to recognize dangers we face? Texas laying the groundwork for electronic gold-based money - Business Insider

OMG!

Will the wonders never cease!!!

[Whisper66]

Quote:

Originally Posted by Fred123 The debt servicing ratio to GDP is a whopping 1.24% as of 2015 -- the lowest it's been since about 1974 (see https://research.stlouisfed.org/fred...es/FYOIGDA188S). Note that the inflationistas/gold bugs/sky is falling folks have been predicting fiscal doom for close to 10 years now, and yet it never seems to materialize.

And the Pollyanna's can come up with meaningless statistics like this to explain this absolutely booming economy growth we have today. Don't know why those silly folks in the Feds would have kept interest rates so low and pumped money into the economy through quantitative easing when our economy is so strong as indicated by such meaningful statistics.

[Fred123]

Quote:

Originally Posted by Whisper66 And the Pollyanna's can come up with meaningless statistics like this to explain this absolutely booming economy growth we have today. Don't know why those silly folks in the Feds would have kept interest rates so low and pumped money into the economy through quantitative easing when our economy is so strong as indicated by such meaningful statistics.

Interesting take, except it has nothing to do with the subject. The statistic I quoted doesn't say anything about how robust the economy is. It's a measure of how dangerous current debt levels are.