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Thread: The 'End Game' draws nigh - future evolution of debt to GDP ratio

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    Default The 'End Game' draws nigh - future evolution of debt to GDP ratio

    this is fairly technical in nature, but certainly makes many interesting points ...



    (snip)"Two new uncertainties are now rising to the fore. First, will traditional fiscal and monetary policy suffice to restore economic growth -- and in the process restore the viability of the financial sector? Without the latter, there is little hope of revived growth. Our concerns about the inadequacy of traditional macroeconomic policy were discussed at length in our February 2009 PROFILE, and are summarized in Figure 2 taken from that analysis. The flattening out of the stimulus curve in the figure reflects that, when fiscal stimulus exceeds a certain level (e.g., 7% on the horizontal axis), the financing of deficits is likely to cause a sharp increase in real longer-term interest rates. Importantly, this holds true regardless of whether the huge deficits are monetized for reasons we carefully articulated. Higher real yields in turn neutralize the original fiscal stimulus, thus causing the curve to flatten out.1

    We concluded that the risks of policy failure in today's context are disturbing. Moreover, even if traditional policies do prove successful in the shorter run, there is a genuine risk that the huge amount of debt that accrues and must be serviced in the future could transform the US into a "banana republic" in the much longer run. This risk is heightened by the need to fund soaring Social Security and Medicare "entitlements," as record numbers of baby-boomers retire during the next two decades. Moreover, as time goes on, it is precisely these longer-term risks that will matter most to the market, and will increasingly be discounted. Investors of every stripe will be impacted."(snip)




    (snip)"Rebounders versus "Banana Republics": To begin with, note that what matters is not a onetime rise in the Debt-to-GDP ratio due to a particular shock (e.g., today's US housing and credit crises), but rather the dynamic trajectory of the ratio in the years subsequent to the initial rise. It is the direction of this trajectory that is all-important. If the Debt ratio continues to rise, then it tends to accelerate due to the ever-rising cost of servicing this ever-rising "primary" deficit. Not only does the increasing debt-load itself cause ever-higher servicing costs, but the rising real rates that typically result from ever-greater debt make the spiral ever worse. The result can be economic and social collapse"(snip)


    Visit author Dr. 'Woody' Brock's website at


    I would also point out that, after yesterday's California special election where voters resounding rejected all measures to increase their tax rates in order to reduce their state budget deficit, the above description accurately depicts where Californians now finds themselves.

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    Default Re: The 'End Game' draws nigh - future evolution of debt to GDP ratio

    and this chart provides some interesting perspective ...


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    Default Re: The 'End Game' draws nigh - future evolution of debt to GDP ratio

    ^^^ That's a bit misleading since bills do need to get signed or vetoed by the President.

    I would find it more interesting to see a chart that overlays it with control of the executive.

    From a quick eye-ball view (Regan 81-89, Bush I 89-93, Clinton 93-01, Bush II 01-09 and Obama 09 to present) it appears the that fiscal policy is best managed when opposing parties control the branches.

    - Up to 93 the chart is fairly steady (D - House, R - Pres)

    - 93-01 best years and economic growth (R - House, D - Pres)

    - Things take a turn south in 01 (R - House, R - Pres)

    - Things to improve a bit aroung 06 (D - House, R - Pres)

    - It hits the fan 09 (D - House, D- Pres)


    It appears the country is best served when the system of checks and balances can work.

    As they say, power corrupts and absolute power corrupts absolutely. When either party has contol of both, it is rarely a good thing for the country.

    With any hope the R's will regain control of the house in the mid-term elections, so one party won't be able to run amuck.
    If you can't win. Make the fellow in front of you break the record.


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    Default Re: The 'End Game' draws nigh - future evolution of debt to GDP ratio

    ^^^ while there may be some merit in your statements, like mainstream US media it also sidesteps the basic premise of this thread. Try a small calculation ...

    from the projected 2010 US GDP was expected to be in the ballpark of 13.2 trillion dollars ... it may actually come in at a significantly lower value.

    Obama's $ 800 billion stimulus package plus other 'stimulative spending' measures (like forgiveness of loans to GM and Chrysler) is, at minimum, going to add up to $1.5 trillion in 2010.

    You'll notice that this percentage of fiscal stimulus clearly falls on the 'flat' portion of the curve i.e. additional gov't spending provides zero additional stimulus effect.

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    Default Re: The 'End Game' draws nigh - future evolution of debt to GDP ratio

    I don't disagree with your op, just simply commenting on the second post.
    If you can't win. Make the fellow in front of you break the record.


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    Default Re: The 'End Game' draws nigh - future evolution of debt to GDP ratio

    and surprise surprise, the second phase of Obamanomics is rearing it's 'ugly head'



    (snip)" Dollar Sinks Yet Again

    NEW YORK (AP) - The dollar kept falling Friday, notching fresh multimonth lows against the euro, pound and yen as a warning that Britain's debt level may result in its credit rating being cut ricocheted into worries about the massive U.S. deficit.
    The 16-nation euro rose to $1.4015 in morning trading from $1.3889 in New York late Thursday—its first time above $1.40 since Jan. 2. "(snip)

    (snip)Because Britain is pursuing similar policies to the U.S.—with both the Bank of England and the Federal Reserve injecting billions of dollars in their economies by buying assets from banks—the move also weighed on U.S. assets and the dollar. Treasurys sold off Thursday, and continued to do so Friday.

    S&P's announcement "wound up creating more problems for the U.S. dollar than for the British pound," HSBC analysts said in a research note.

    "The problem for the U.S. is particularly acute because of its reserve status," said UBS analyst Brian Kim in an e-mail to investors Friday. Major holders of U.S. debt, such as Middle Eastern sovereign funds and the Chinese government, have not been shy about calling the U.S. out for what it sees as policies that will trigger inflation, shrinking the value of their Treasury holdings.

    The Fed in March said it planned to buy up billions in long-term Treasurys and $1.25 trillion in mortgage-backed securities, flooding the money supply.

    "The dollar has weakened as dollar bears have now added concerns on U.S. credit ratings to their arsenal," Kim said.

    Earlier this month, the Obama administration hiked its forecast for this year's federal deficit to $1.84 trillion. The deficit is approaching $1 trillion for the budget year that began Oct. 1.

    Big deficits mean the government has to borrow more, which could put its credit rating at risk. They can also put upwards pressure on inflation, thus cutting the purchasing power of the dollar. "(snip)


    ^^^ which basically translates into every 'world market' commodity from food to gasoline to concrete to copper / aluminum / steel have just taken a big upward jump in US dollar terms.

    '



    ^^^ which basically translates into an observation that benchmark 'long' US interest rates are now rising rapidly. The 10 year US treasury bond interest rate, which has moved from 2.2% at the beginning of the year to 3.45% today, affects commercial interest rates charged for business investments, student loans, prime home mortgages etc.

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