

Interest Costs Poised to Surpass Defense and Nondefense Discretionary Spending - spking
http://blogs.wsj.com/economics/2015/02/03/the-legacy-of-debt-interest-costs-poised-to-surpass-defense-and-nondefense-discretionary-spending/?mod=WSJ_hpp_MIDDLENexttoWhatsNewsForth

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Hermel
I doubt the assumption of government bond yields raising back to 10%. I would
rather bet on a scenario with ongoing low interest rates.

~~~
joe_the_user
Thanks for pin-pointing the problem.

In this instanced, "poised" means "may happen in ten years if my pet theory
comes true".

Another crank article, essentially.

------
bradleyjg
I can't tell from the article whether the interest payments referred to
includes intra-governmental debt (including on holdings of the federal
reserve).

In any event if the White House believes that interest rates are set to rise,
and given that 30 year bonds are currently yielding 2.63%, it seems like now
would be a good time to increase the amount of long term debt issued (see
[http://ftalphaville.ft.com/files/2014/10/US-debt-issuance-
ma...](http://ftalphaville.ft.com/files/2014/10/US-debt-issuance-maturity-
distribution-2006-2014.png)) and perhaps issue even longer term debt. Japan
sells a 40 year bond, Canada, France, and the UK have each recently issued 50
year bonds.

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msandford
We've let the politicians mortgage our future for our present. It was bound to
catch up with us eventually. Perhaps this will encourage those in Washington
to figure out how to save money lest they all find themselves out of work.

~~~
dragonwriter
> It was bound to catch up with us eventually.

"Catch up" and lead to a situation where even the higher of the estimates has
interest payments at a level that "Most economists and budget experts would
agree [...] are manageable for an economy"?

Not seeing the problem.

~~~
msandford
If you believe economists and budget experts then you're absolutely right,
there is no problem. But economists as a whole do no (or a tiny margin) better
than chance at predicting a lot of things. So I'm not sure that their
confidence that everything will be OK is terribly reassuring.

[http://www.automaticfinances.com/monkey-stock-
picking/](http://www.automaticfinances.com/monkey-stock-picking/)

[http://www.theguardian.com/science/2012/jul/08/this-much-
i-k...](http://www.theguardian.com/science/2012/jul/08/this-much-i-know-
daniel-kahneman)

[http://www.newyorker.com/magazine/2005/12/05/everybodys-
an-e...](http://www.newyorker.com/magazine/2005/12/05/everybodys-an-expert)

If I build bridge after bridge and they all fall down at some point you're
going to have to wonder if my engineering degree is worth even the paper it's
printed on.

An expert whose expertise is little better than chance can't really be called
an expert, no matter how impeccable their credentials or how long their
career.

~~~
dragonwriter
> If you believe economists and budget experts then you're absolutely right,
> there is no problem. But economists as a whole do no (or a tiny margin)
> better than chance at predicting a lot of things.

You do realize that the whole thing you are trying to get us scared about is,
itself, a prediction of future levels of debt service costs relative to other
government expenditures by CBO and OMB economists and budget experts.

So, if you _believe_ economists and budget experts, then (a) you have a basis
for believing the situation you are trying to raise concerns about will occur,
but (b) you likewise have the same basis for believing that the situation
won't be a problem.

Conversely, if you _don 't_ believe economists and budget experts, (a) you
don't necessarily have a reason to believe that the situation you are
concerned about would not be a problem, but (b) for the same reason, you also
don't have a reason to believe that the situation you are concerned about will
actually occur.

If you want to make the claim that the situation predicted by CBO and budget
experts will occur _and_ that if it occurs, it wwill be a problem, you need
more of an argument than "economists and budget experts are sometimes not
better than chance at predicting some things".

~~~
msandford
In this case their predictions are of the "look at the trend and extrapolate
over a few years" kind which I am familiar with, and have a reason to believe.

There's a HUGE difference between extrapolating a trend which shows no signs
of slowing, and "predicting" that it will in fact be no problem whatsoever.
Extrapolating a trend requires no particular expertise.

But judging the impact of a particular cashflow on an economy as a whole,
well, that's a much bigger deal. How do they "know" that it won't be a
problem? Can they assure us we won't enter yet another war and have to print
money even faster? Are they confident that inflation will never get away from
us? Have we already dodged and will we continue to dodge the liquidity trap?
What happens if deflation takes over in the US -- like it has in Japan --
despite heroic levels of QE?

Given that economists are unable to answer those questions plausibly (i.e.
they can't accurately predict the future) it stands to reason that their
assumption (which is what it really is) that the level of debt service is OK
is a bit questionable in my mind.

Remember, extending a trendline on a single metric (US debt or interest
payments) and doing the same on a million metrics (everything that makes up
the US economy) are two WILDLY different things.

~~~
dragonwriter
> In this case their predictions are of the "look at the trend and extrapolate
> over a few years" kind which I am familiar with, and have a reason to
> believe.

Those predictions necessarily involve predictions of revenue levels (and thus,
general economic performance, and thus, the impact of debt service levels on
general economic performance) for all the intervening years.

Which means accepting them means accepting that the "experts" involved can
predict the impact of debt service levels on general economic performance,
which is exactly the thing you have to assume they cannot do to dismiss the
relevance of economists and budget experts opinion on the final condition.

> Remember, extending a trendline on a single metric (US debt or interest
> payments) and doing the same on a million metrics (everything that makes up
> the US economy) are two WILDLY different things.

Debt service costs are a product of: 1) Starting debt levels, 2) Government
revenue vs. expenditures in the intervening period, and 3) Cost of borrowing
for the government in the intervening time.

Note that #2 is dependent on performance of the overall economy, including all
factors which influence the overall economy (and not _just_ the aggregate
performance, but how that performance is distributed relative to what
government taxes.)

~~~
msandford
So if these folks are so good at predicting to the point where we should trust
their predictions, then why aren't they all retired from predicting the stock
market and getting rich? Wouldn't that be the path of least resistance for
someone who is good enough at this to be worth listening to?

I think it's plain for most folks to understand that living beyond your means
continually eventually means that debt payments comprise a large portion of
your budget. No clairvoyance needed there. This is what the US government is
doing right now. It's not hard to see that eventually the debt will be
crushing.

What's much harder to do is predict exactly at what point this will occur. I
would fully agree that the exact date of the debt service exceeding other
large fixed payments is highly speculative. But that it will happen, absent
structural changes, I don't find terribly contentious.

Deficits are nearly constant, surpluses are rare and minor.
[http://www.davemanuel.com/history-of-deficits-and-
surpluses-...](http://www.davemanuel.com/history-of-deficits-and-surpluses-in-
the-united-states.php)

~~~
dragonwriter
> So if these folks are so good at predicting to the point where we should
> trust their predictions, then why aren't they all retired from predicting
> the stock market and getting rich?

Because the value of particular investments is a different thing than any of
the things that they are dealing with, in much the same way that climate is
different than weather.

> I think it's plain for most folks to understand that living beyond your
> means continually eventually means that debt payments comprise a large
> portion of your budget.

This isn't actually necessarily true. IF you continually live beyond your
means (expenditures > revenue) then, assuming financing costs aren't
continually decreasing, you will have debt service costs that, on average,
increase over time.

If your revenue also increases over time, however, its quite possible to
continually have expenditures exceed revenue without having debt service costs
increase as a share of total expenditures.

> It's not hard to see that eventually the debt will be crushing. [...] What's
> much harder to do is predict exactly at what point this will occur.

That's the only thing that matters. Predicting what a trend would result in
given an infinite time horizon is pointless "But this long run is a misleading
guide to current affairs. In the long run we are all dead." [0]

> I would fully agree that the exact date of the debt service exceeding other
> large fixed payments is highly speculative.

Defense and nondefense discretionary spending may be large, but they aren't
fixed.

> But that it will happen, absent structural changes, I don't find terribly
> contentious.

I'm not really interested in why you find it contentious, I interested in the
basis for your position that the level of debt service at which that will
occur is a (1) problematic in itself as a level of expenditures on debt
services (dismissing the conclusion in the article that the expert consensus
is that it is not), and therefore a matter of near term concern.

[0] John Maynard Keynes, _A Tract on Monetary Reform_ (1923)

~~~
msandford
> This isn't actually necessarily true. IF you continually live beyond your
> means (expenditures > revenue) then, assuming financing costs aren't
> continually decreasing, you will have debt service costs that, on average,
> increase over time.

This is actually totally true. It's neigh tautological. If you're always
adding debt then everything else equal, debt service costs go up. If you're
adding debt while interest rates drop, debt service costs might go down. But
in the end interest rates (at least for the majority of human existence minus
a few short periods) have been positive, and not only positive but higher than
they are right now.

Speculating that things will be OK because interest rates will stay low only
makes sense if you're:

1\. An idiot with no understanding of history and a complete lack of ability
to do sensitivity analysis

2\. Someone who has the ability to control the interest rate

In my mind we've got a whole bunch of folks in camp 1 and 2 at the moment.
Thanks to them we've got high REAL unemployment and non-trivial REAL
inflation. Before you say "but unemployment is 5.6%!" I would encourage you to
understand the way the unemployment metric is calculated and to ask if you
think that's the proper way to do it.
[http://www.gallup.com/opinion/chairman/181469/big-lie-
unempl...](http://www.gallup.com/opinion/chairman/181469/big-lie-
unemployment.aspx)

And before you suggest that the inflation numbers are legit, please do a
thorough review of the methodology and explain to me how constantly changing
the benchmarks doesn't constitute some kind of academic dishonesty if not
outright fraud. Just because the government says something doesn't make it
true.

For example, they tried that with the Kennedy Half Dollar and no matter how
many they made people kept buying them because although the official value was
$0.50 the actual value in terms of metal was much higher.
[http://en.wikipedia.org/wiki/Kennedy_half_dollar#Initial_pop...](http://en.wikipedia.org/wiki/Kennedy_half_dollar#Initial_popularity)

