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bruce MN
Advisor

Wondering...interest costs

With delayed palnting in many areas andother uncertainties looming the chances for a "short year" are a real possibility for many farmers.

 

If income is short and debt retirement not as much as planned and interest rates were to spike a bit it appears that the Ryan wing of the GOP's recommendation would be to either cut back drasticly on inputs for 2012 or maybe just throw in the sponge.

 

Krugman:

 

The whole tone of current discussion about deficits is one of urgency: deficits must be brought down now now now or crisis looms. Where is this coming from? Not from the arithmetic.

The way the story is often told, deficits mean higher debt, which means higher interest payments, which can mean a spiral into bankruptcy. And qualitatively that’s not wrong. If you put numbers to it, however, for countries that are not facing huge risk premia, the spiral is very, very slow.

Here’s a sample calculation.

The latest IMF Fiscal Monitor predicts that general government in the US — that’s federal, state and local combined — will run a deficit of 7.5 percent of GDP next year, and that net debt will be 75 percent of GDP.

So how fast would the debt spiral be going?

You need to bear in mind that growth and inflation limit the rate of rise in the debt ratio. Suppose that we have 4 percent nominal GDP growth, which is actually low by historical standards. This shaves 3 percentage points off the rise in the debt/GDP ratio. So a year later, given those numbers, debt rises by 4.5 percentage points of GDP.

What’s the interest burden of that rise? At minimum we should correct for inflation, so use the TIPS yield. That’s currently below 1, but let’s be pessimistic and call it 2. Even so, the added interest burden is less than one-tenth of one percent of GDP.

So even with substantial deficits, the pace of long-term budget worsening is very slow. If it’s a debt death spiral, it’s a slooooowww motion death spiral.

But, say the critics, psychology can change suddenly, sharply raising those interest costs. The question then is why psychology should change. Investors can do the same arithmetic I’ve just done; why should they panic over a small rise in the interest burden?

Now, investors might well panic over signs of political deadlock — but that could happen regardless of the current year’s deficit.

Still, Serious People tell us that investors will turn on us unless we slash the deficit immediately — and they know this because, well, um …

As I’ve often written, we’re in a strange state now where people who actually take textbook economics and simple arithmetic seriously are seen as dangerously radical and irresponsible, while people who believe in invisible bond vigilantes and confidence fairies, who claim to know what the market will want even though there’s no sign of that desire in current asset prices, are viewed as Very Serious.

Anyway, the arithmetic of debt is much less scary than you might think.

 

 

 

9 Replies
tomtoolbag
Senior Contributor

Re: Wondering...interest costs

  The debt is the latest version of turning a molehill-into-a-mountain crap of a political strategy from the right wing. All we heard from that side for awhile was the jobs, jobs, jobs mantra until they realized that they don't want that part of the economy to improve whatsoever. If it does, their chances for gains in seats for Congress and even the remote chance at the white house diminishes. So they want even the most trivial and miniscule BS to constantly be front and center, because it's their last and only option of not being shellacked in the next general election.

  As always though, desperation breeds madness and for a perfect example of that look at their "presidential contenders" that go away as quickly as they come onto the horizon.

Samnospam
Advisor

Re: Wondering...interest costs

 

Its very easy to see in that clip from Krugman why he has no credibility. He is smart enough to know how disingenuous that is, that makes him a liar with an agenda. Can you pick out the lie in that? I'll help you, its in here:

 

You need to bear in mind that growth and inflation limit the rate of rise in the debt ratio. Suppose that we have 4 percent nominal GDP growth, which is actually low by historical standards. This shaves 3 percentage points off the rise in the debt/GDP ratio. So a year later, given those numbers, debt rises by 4.5 percentage points of GDP.

 

I'll even include a definition for you to make it extra easy:

 

GDP:
The monetary value of all the finished goods and services produced within a country's borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments, and exports less imports that occur within a defined territory.

hardnox604008
Advisor

Re: Wondering...interest costs

Hi Bruce,

 

I saw the Krugman piece but demurred on posting it- zero cred with most of this crowd anyway- probably best that you buried it in this post.

 

Sorta kinda amazes me that we've managed to get the whole discussion wrapped around the supply side of things- even to a much greater extent than in the past where it had some validity. Of course the problem is that we have oodles of supply but lack of demand. Regardless of tax rates, incentives etc., if a businessman projects that he can sell increased future production at a profitable level he is going to expand assuming access to capital etc.

 

Apparently the owners of Taco Bells and whatnot either don't believe that (actually the commercial RE inflation paradigm that they've ridden is dead, in that case so it is a poor example) or they have decided that they are so onerously burdened that they will just John Galt it and walk away while the world collpases due to his decision not to play.

 

Unfortunately that doesn't actually happen- a 10,000 acre cropper walks away and the acres will be absorbed in a fortnight and all that will ensue is some snickering at the coffee shop at what a dumbass he was.

 

Anyway, on ag, it will certainly be interesting. No doubt in my mind that the party starts to wind down at some point, the only question I have is how much the politics have changed in terms of how much in the way of resources the government is willing or able to commit to backstopping the folks at the forefront.

 

How should I know? I actually thought the government was serious about F2F in '95. Lol.

 

Best, h

r3020
Senior Advisor

Re: Wondering...interest costs

Krugman fails to identify who will buy the debt. He also fail to mention how much of our government obligations and  interest are index to inflation.

kraft-t
Senior Advisor

Re: Wondering...interest costs

The debt and deficits will be a big problem until the repubs gain control of the three branches of government. Then it will no longer be aproblem until the democrats rise to power again.

 

It's not anew phenomenon. We went throught the reagan Bush I era without a worry about debt or deficits. Clinton was elected and suddenly debt and deficit was a concern. We cannot let dems have enough money to function.

 

Gw Bush elected and the same repubs that were so fiscally responsible during the Clinton era changed into spending lunatics. Did they ever vote against anything Bush proposed?

 

Enter Obama and suddenly debt and deficits become a problem and with the economy in the tankl lets cut social spending as if that was what  created the deficit and debt. Remember government has been borrowing the SS trust fund not the defense department  surplus.

 

So instead of addressing issue that are running a short fall lets attck social spending which has been running a surplus. That's like having a sick hog and treating the one that is well. Or being in a war in afghanistan and redirecting to Iraq. You repubs show interesting logic.  Perhaps that like iraq, SS  and medicare are not an immediate threat but lets attack them because we want to.

 

I guess they think the american public will still pay the SS and fica taxes even though there is no benefit on down the line Then thay can use SS and fica tao give corps more taxcuts. Yeah that makes sense. It's worked so well already.

 

 

schnurrbart
Veteran Advisor

Re: Wondering...interest costs


@r3020 wrote:

Krugman fails to identify who will buy the debt. He also fail to mention how much of our government obligations and  interest are index to inflation.



I sorta figured that all you big time operators on here would buy most of it and then if you lose in the elections, you can gain the govt by foreclosing on it and insert whomever you want to run the country.

ollie2655
Senior Contributor

Re: like the arabs did

you men like the arabs did in the election when obamo bought the welfare whores votes--yea i agree that was bad --aint this fun

bruce MN
Advisor

Re: Wondering...interest costs

As hellasciously good a post as I've ever seen here Don. And one that has stood here for a good time now, as the usual suspects have educated us on Middle Eastern history, the evils of medicare and yet again the President's pedigree and birthplace; yet not one feeble response to this rock solid masterpiece of yours.

 

Do you have any idea just how much the fact that you hold the general views that you do and the incredible understanding you hold  of how things really work in the world rattles these people here?  When you are  in every way, technically "one of them". It's most certainly much, much more than the obvious "liberal" compassion and charity you hold toward and for your fellow man.

 

More particularily when you are the successful small business owner, progressive farmer and stasified and proud family man that you are makes these steeped in self-declared jingoistic exceptionalism that is based only on what they "believe"?

 

Who you are and what you've done is supposed to make one into a person who beleives as they do. Maybe it's just that you are simply confounding them.

kraft-t
Senior Advisor

Re: Wondering...interest costs

You are too kind and generous!.  Thank you , Bruce.