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  USA Debt Wall

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  update of TRENDLines Debt Wall chart ~ Effect of USA Structural Deficits on USA National Debt & Projected Downgrades of Sovereign Bonds by Ratings Agencies

 

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see also:   Monthly update of USA Trendlines Recession Indicator & charting 2024 Severe Recession  (TRI USA)

As with all FreeVenue graphs, the Debt Wall  chart is posted here 90-days after the guidance release @ the MemberVenue

 90 days too long to wait?  View our current guidance charts via:  (a) Annual-membership special of $25/month or (b) $33/month Quarterly access or (c) $50 project access-fee

 

 

clik Trendlines Recession Indicator chart to view consequences of a potential 2024 USA Treasuries yield surge and resultant Austerity Crisis & multi-year Severe Recession

the Debt Wall ~ USA to Hit Austerity Crisis Tipping Point in 2024

Aug 14 2013 delayed FreeVenue public release of May 14th MemberVenue guidance ~ At the same time the Trendlines Recession Indicator calculates data from the PBO suggests federal surpluses will enable Canada to retire its national debt by 2040, American figures provided by the CBO today continue to indicate preservation of long-term entitlements will force rocket the 2040 USA Deficit to $10 trillion (19% of GDP) & drive the Federal Debt to $125 trillion (235% of GDP).

Since Y2k I have attempted to bring attention to the fact such projections are unsustainable.  The TRENDLines Debt Wall chart had typically since 2009 illustrated the magnitudes involved on the present course and began to annotate where certain tipping points were being signaled along the route.  I was continually troubled this depiction did not fully translate the macro consequences of inevitable interventions.  So the Debt Wall & the Trendlines Recession Indicator models were enhanced to alert stakeholders, policymakers, investors and legislators it is inconceivable the Treasury Dept can continue the Deficit related massive borrowing with impunity.

Starting March 2013, TRI & Debt Wall charts break with traditional sky's-the-limit graphs and tables and instead depicts a best efforts projection of a probable path for GDP and Federal Deficits & GDP after certain tipping points are transgressed.  The calculation of this critical threshold includes empirical observations of Deficit & Debt to GDP ratios, the long-term borrowing rate environment, the trajectory of fiscal balances for jurisdictions.  Conversely, recent discourse in the realm of academia seems to be restricted to the sole factor of Debt/GDP.  This lack of robustness robs such efforts of any value of predictability.

The initial signals of deterioration of the sovereign debt issuance environment arose with the USA's AAA sovereign bond rating being cut in July/2011 by Egan-Jones (S&P a month later) and a second Egan-Jones trimming in Sept/2012.  Fortunately for the Treasury Dept, the yield effect was lost in a concurrent rush for safe haven due to Eurozone issues.  Having the ability to print currency, it is of course highly improbable the American Gov't would ever actually default.  Rather, rising yields reflect the potential of excess printing, currency debasement and the real prospect of investment & capital losses upon repatriation of foreign invested funds if  Congress continues to be perceived as dysfunctional and incapable of prudent fiscal management.

Debt Wall analysis assumes status quo in DC.  Failing a sea change in political leadership to address fiscal responsibility, chart annotations illustrate the effects of deteriorating metrics on bond ratings and yields.  The Egan-Jones actions are just the start for what is certainly to become a continuing saga of monthly incremental downgrades thru the A, B & C series of ratings.  Piggybacked on a normalization of interest rates as the current business cycle matures, it is forecast the 10-yr bond's present 2% yield will double by 2021 and approach six percent (and a "CC" rating) in 2023 upon attaining a critical mass of ugly metrics.  The $26 trillion gross federal debt prompts a 116% Debt/GDP ratio and the record $1.44 trillion Deficit sports a 4.9% Deficit/GDP ratio.  All factors combined, the Debt Wall deems the federal gov't has encroached the tipping point.

2024 accelerates the surge in bond yields and ushers in 6% bonds.  An epiphany moment overwhelms the Treasury Secretary and the realization of diminished returns should the Dept attempt massive borrowings at these higher rates.  Restricted from bumping taxes, any increased debt service requires offsets in program spending.  The remedy is not pretty.

Resigned to the fact the credit card is about to be confiscated, Congress wrestles with the reality of being forced to implement the harshest of peacetime austerity measures ever witnessed ... eliminating in full the $1.4 trillion Deficit.  The models predict $361 billion will be chopped over four consecutive years.  Real GDP plunges to -8.6% by 2024Q3, the Debt/GDP ratio climbs to 134% by 2027 and the unemployment rolls shoot up 50%.  In short, the American economy has entered a Severe Recession with a -3.1% avg RGDP and lasting 40 months.  See the TRI USA long-term chart to view the consequences of an Austerity Crisis on Real GDP performance.  If there is good news, it is that the Federal Debt will be in plateau ($28 trillion), by 2030 the Debt/GDP ratio will have receded to 122% and the bond rating will have improved to "CCC".

There are many in Congress who would luv to re-balance today's Budget on the short-term.  But TRI modeling reveals Structural GDP was -3.4% in April and SGDP has in fact avg'd -8.4% since March 2007.  Put another way, removing the influence of fiscal policy via Deficits at this time would expose the magnitude of the underlying malaise.  The economy is mired in a Structural Greater Depression event and Real GDP would be -3.4% in the absence of the Deficit.  Another faction in Congress desires stimulus in the fashion of infrastructure projects; but the truth is however good intentioned this strategy, the additional borrowing would only hasten the Austerity Crisis to an earlier date unless a similar portion of entitlement spending is pared.  Ahh, remember PayGo?...

This dilemma gave birth to the so-called Grand Bargain.  Those desirous of infrastructure spending today will only achieve it by sacrificing offsets to long-term entitlements.  Left meets right and each wins and loses to make headway via compromise.  Tax reform would contribute to econometric stabilization.  The Bowles-Simpson led commission and others have proposed Congress strive for a 60% Debt/GDP ratio.  This keeps enuf dry powder for major downturns.  Discretionary spending is almost meaningless to the discussions.

primary data source:  The chart's Congressional Budget Office extended alternative fiscal scenario incorporates the assumption certain policies in place for a number of years will be continued and some provisions of law which might be difficult to sustain for a long period will be modified.  The trajectory is vulnerable to unforeseen geopolitical issues, weather events & natural disasters...
 

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3 ways to join the MemberVenue:

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Trendlines Research  ...  Providing macro-economic charts & guidance for Legislators, Policymakers, Investors & Stakeholders
long-term multi-disciplinary perspectives by Freddy Hutter since 1989
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Last modified: October 22, 2013