Today I want to connect a few dots that I feel indicate that the US is perilously off course and slipping behind.
We begin with an interesting article In Minyanville (found by user Rickets) that I will be turning into a full report soon. It makes the case that US debt service payments are negligible on the basis of GDP and that therefore we are not near any sort of funding crisis or limit.
The US is currently paying a blended average interest rate of around 3.5% on the totality of US public debt held by the public — note that this excludes interest payments on intergovernmental debt. [I]nterest payments (not total debt service, which includes payment of principal) as a percent of GDP are equivalent to about 1.4% of GDP. Let me repeat: US government interest payments are only equivalent to roughly 1.4% of national income.
Furthermore, if we factor in long-term inflation of about 2.5%, the US is essentially paying a real interest rate of about 1.00% on its debt. This translates into a real interest burden of about 0.4% of real GDP. This is almost an insignificant figure.
(Source)
There is much to critically examine in this article. The blended average interest rate on debt-held-by-the-public is actually 2.48% (not 3.5%, as stated in the article), GDP and national income are distinctly different measurements, and what is truly relevant here is expressing interest payments in terms of federal receipts rather than in terms of GDP. On that basis, current interest payments consume 9.0% of income, not 0.4%.
But the main conclusion, which I happen to agree with, is that the US is not currently experiencing any sort of a fiscal/funding crisis. Emphasis on currently.
As we learned from Greece, it is entirely possible to go from “seemingly well-funded” to “in deep doo-doo” in relatively short order. All that has to happen is for sovereign interest rates to spike upwards.
In my upcoming report, I will model the variables so that we can know what sorts of things to watch out for. At what rate of interest does 100% of federal revenue become consumed by interest payments alone? What sorts of receipts and outlays would lead to that outcome in the absence of any exogenous event (like a Treasury auction failure)? What happens if GDP double-dips in 2011?
by former_user 
