Federal Budget

[MachineGhost]

Did anyone notice in Obama's 2013 federal budget that the net interest payable on the debt will overwhelm all non-discretionary spending starting in 2017?  Obama's projection assumes that interest rates do not rise and the economy does not go into another recession.  It also includes the deficit reductions and TARP extensions.

I'd love to see an example of how this is supposed to work out in actual practice in MMR-land.

[moda0306]

For those of us too lazy to dive into the into the internets, would you mind posting your source on this?  It sounds interesting.

When you say "overwhelm," do you mean will simply be higher than all non-discretionary spending?  Ie, it will be higher than spending on SS, Medicare, Medicaid, welfare, and unemployment, combined?

[moda0306]

Before even looking at it, I wonder how much of that interest will get credited back to the treasury via the federal reserve.

Further, any inflation generated reduces our debt/GDP ratio even if we have no real growth.  One might say, to develop a fiscal crisis we'd have to dive ourselves into a deflationary depression and purposefully raise interest rates, and it's not like anyone's trying to... oh wait... nevermind .

I kid.

[MachineGhost]

Look at page 6.

http://www.whitehouse.gov/sites/default ... tables.pdf

[MachineGhost]

When you say "overwhelm," do you mean will simply be higher than all non-discretionary spending?  Ie, it will be higher than spending on SS, Medicare, Medicaid, welfare, and unemployment, combined?

It dominates non-defense discretionary spending.  The social safety nets are not considered discretionary.

[MachineGhost]

Before even looking at it, I wonder how much of that interest will get credited back to the treasury via the federal reserve.

Further, any inflation generated reduces our debt/GDP ratio even if we have no real growth.  One might say, to develop a fiscal crisis we'd have to dive ourselves into a deflationary depression and purposefully raise interest rates, and it's not like anyone's trying to... oh wait... nevermind .

I don't know what "net interest payments" mean, but the net is a modifier of some sort.  

If I had to guess, I think we can expect to see 1970's high inflation rates starting around 2017 or sooner if revenues drop during in the next recession.

[moda0306]

I wonder if the "net" means it's reduced by any interest it receives from the federal reserve for treasuries owned by it.

Is there something significant about non-defense discretionary spending that eclipsing it is a bigger deal than anything else?

I guess I still come to the point that either the fed controls rates or it doesn't.  If the fed controls rates, then we never have to worry about an interest-rate/default-risk spiral.  However, if the fed holds rates "unnaturally low," people will start to play hot-potato with the USD and we will end up with inflation, which will mean our debt/GDP ratio will fall back into balance.

If the fed does NOT control rates, then rates are a function of markets, which means that the market is lending the US government money at less than the projected rate of inflation (especially if you use the Peter Schiff projected rate ).

What makes this all even more complex is that these public liabilities (private assets) are not just held by US citizens, but foreign governments and individuals hold them.  This means we've exported our dollars for foreign widgets (as we continue to), and as long as we have a trade deficit that's a sign that our dollar is being demanded over seas in the place of "hard assets."  I really don't know how to fully absorb all this, but when I look at peoples' balance sheets, I don't see the private sector being in a position to create inflation or high interest rates.

[MachineGhost]

Is there something significant about non-defense discretionary spending that eclipsing it is a bigger deal than anything else?

I think its an early-warning sign that the interest on all outstanding debt is compounding so rapidly that it is starting to consume all of the spending like Pac Man.  At some point all spending would just go directly to paying the interest each year.  At a threshold like that, you would have to increase spending at an order of a magnitude higher than the exponetially compounding interest due and I just don't see how that is possible.  At some point, people will cry "Uncle!" including the Primary Dealers.  This wouldn't be a solvency or a liquidity criss, but a confidence crisis.  I see the end game as either hyperinflation or debt repudiation or even both.  I mean, how else do you get out from under the jack-booted thumb of the most powerful force in the universe?

[MediumTex]

Is there something significant about non-defense discretionary spending that eclipsing it is a bigger deal than anything else?

I think its an early-warning sign that the interest on all outstanding debt is compounding so rapidly that it is starting to consume all of the spending like Pac Man.  At some point all spending would just go directly to paying the interest each year.  At a threshold like that, you would have to increase spending at an order of a magnitude higher than the exponetially compounding interest due and I just don't see how that is possible.  At some point, people will cry "Uncle!" including the Primary Dealers.  This wouldn't be a solvency or a liquidity criss, but a confidence crisis.  I see the end game as either hyperinflation or debt repudiation or even both.  I mean, how else do you get out from under the jack-booted thumb of the most powerful force in the universe?

Unless it can be refinanced at lower rates.

As dumb as that sounds with rates where they are, I think that is what Japan has been doing for years.