US Households: Interest Burden on Debt Lowest Since 1993

[Beet]

Thanks to a combination of deleveraging and lower interest rates, US households are paying the lowest share of disposable income on debt service since 1993.

http://www.federalreserve.gov/releases/housedebt/

The total 'Financial Obligations Ratio' has fallen to 16.09-- the lowest in nearly two decades.

[phk]

When will the deleveraging stop Beet?

[Wonkish1]

Thanks to a combination of deleveraging and lower interest rates, US households are paying the lowest share of disposable income on debt service since 1993.

http://www.federalreserve.gov/releases/housedebt/

The total 'Financial Obligations Ratio' has fallen to 16.09-- the lowest in nearly two decades.

When you realize that the two largest sources of this come from low interest rates and foreclosure the picture isn't quite as rosy.

One of the reasons why I'm actually a supporter of many peoples decisions to strategically default is because its one of the few areas where some real deleveraging is occurring.

Improving people's balance sheets takes a while.

But it should be pointed out that deleveraging hasn't actually occurred in the US or anywhere else. Its just been transferred to the public balance sheet and continued to grow. And artificially low interest rates are just fueling public debt this time instead of household debt after 2001.

The low interest is a temporary mirage. It isn't actually real. Eventually all parties will realize it when they come roaring back up to normal(and maybe even then some). And just like the homeowners who felt the pinch of higher interest rates in 2006 it will be our government this time around.

[Wonkish1]

When will the deleveraging stop Beet?

A lot of the "deleveraging" is a myth. Its not actually happening. If you combine public balance sheets none has happened and instead we are more leveraged than in 2008. And if you don't combine public balance sheets its a little better and slow moving.

[Beet]

The deleveraging itself still has a long way to go because gross debt to income has only reversed 35-40 percent of the bubble-era buildup. Debt service has come down a lot faster owing to falling interest rates.

Wonkish1: During the Great Depression, interest rates collapsed and remained low for decades. Low interest rates aren't necessarily a mirage-- just ask Japan. Low interest rates can go on for a loooong time.

And yes, deleveraging has indeed occurred. If you look at total credit market debt, even including government debt, it has fallen by about 30% of GDP for the US since the peak (as percentage of GDP) in the first quarter of 2009. That's something that hasn't happened in at least 30 years.

[Wonkish1]

The deleveraging itself still has a long way to go because gross debt to income has only reversed 35-40 percent of the bubble-era buildup. Debt service has come down a lot faster owing to falling interest rates.

Wonkish1: During the Great Depression, interest rates collapsed and remained low for decades. Low interest rates aren't necessarily a mirage-- just ask Japan. Low interest rates can go on for a loooong time.

And yes, deleveraging has indeed occurred. If you look at total credit market debt, even including government debt, it has fallen by about 30% of GDP for the US since the peak (as percentage of GDP) in the first quarter of 2009. That's something that hasn't happened in at least 30 years.

I'm well aware of what happened in Japan. The Japanese situation is probably one of my most studied topics I've engaged in over the last few years. We will not be in a Japanese position. Both Japan and the US in the 30s were highly deflationary "recoveries" that isn't not true in the US.

I don't know where you are getting your numbers from, but total credit market debt is at $52.5 trillion the same as it was in 2008 and that is from the St. Louis Fed.

Here:


and

http://ycharts.com/indicators/total_credit_market_debt_owed_unadjusted

[Beet]

I am looking directly at a total credit market debt to GDP series:

http://www.economagic.com/em-cgi/data.exe/var/togdp-totalcreditdebt

Total credit market debt fell from 380 percent of GDP to 350 percent in 3 1/2 years. In the series going back to 1952 there is no such decline as large.

As to your charts they show basically the same story as I am saying-- after decades of relentless acceleration, nominal total credit market debt did not grow from the first quarter of 2009, while real GDP exceeded its peak 2007 level this quarter. Inflation means that nominal GDP is substantially higher than 2007, so total credit market debt to GDP has fallen over the period.

[Beet]

As to the question of interest rates, I can't address the appeal to prior to knowledge argument. However, if you factor in inflation, the low interest rates the US currently faces is even more impressive because those rates are even lower on a real basis. The only way there would be a forced upward rise in US interest rates on a contractionary basis would be capital flight out of the US that would push the dollar downward. But instead we are seeing the opposite- whenever there is trouble, money flees towards the dollar, not away from it. If money were to flee away, then it would indeed result in a crisis and force the US into a balance of payments adjustment, the big nightmare that I know a lot of people fear. But here again, we are in a better position than we were in several years ago-- the US trade deficit is down since 2006, and the deficit ex-petroleum is at 2000 levels. The main thing is to ween our dependence on imported oil.

[Wonkish1]

I am looking directly at a total credit market debt to GDP series:

http://www.economagic.com/em-cgi/data.exe/var/togdp-totalcreditdebt

Total credit market debt fell from 380 percent of GDP to 350 percent in 3 1/2 years. In the series going back to 1952 there is no such decline as large.

As to your charts they show basically the same story as I am saying-- after decades of relentless acceleration, nominal total credit market debt did not grow from the first quarter of 2009, while real GDP exceeded its peak 2007 level this quarter. Inflation means that nominal GDP is substantially higher than 2007, so total credit market debt to GDP has fallen over the period.

Alright that sounds right! But lets just point out that isn't actually deleveraging, but instead the lack of new leverage as the economy grows. There is a difference you know.

I should also point out that the figures don't count for current corporate unfunded pension liabilities. That is another few trillion of debt you could add.

I'm also quite sure those numbers are not counting intragovernmental debt that's another 25-30% of GDP of debt last I checked. As well as state, local, and federal unfunded pension liabilities of public workers. That's another several trillion.

Actual total debt to GDP is currently at about 450%, and while that includes pension liabilities it doesn't include present values of liabilities for promised mandatory spending at the federal, state, and even local level that fall outside of current revenue projections. Add those in and you rise to about 550-600% debt to GDP.

Scary enough for you yet?

[Wonkish1]

As to the question of interest rates, I can't address the appeal to prior to knowledge argument. However, if you factor in inflation, the low interest rates the US currently faces is even more impressive because those rates are even lower on a real basis. The only way there would be a forced upward rise in US interest rates on a contractionary basis would be capital flight out of the US that would push the dollar downward. But instead we are seeing the opposite- whenever there is trouble, money flees towards the dollar, not away from it. If money were to flee away, then it would indeed result in a crisis and force the US into a balance of payments adjustment, the big nightmare that I know a lot of people fear. But here again, we are in a better position than we were in several years ago-- the US trade deficit is down since 2006, and the deficit ex-petroleum is at 2000 levels. The main thing is to ween our dependence on imported oil.

No its the same as after 2001 except on a much more profound level. You get your growth back and the Fed gets a choice of very fast galloping inflation and rampant asset bubbles or raise the FFR in 50+ basis point decisions for many meetings.

It will be growth and the FFR that just slams the Federal government in debt service. Its just the same way that growth in 2006 wasn't able to over come the large increase in debt service higher interest rates brought to homeowners.

It creates a damned if you do and damned if you don't situation. If you cut base rates and to try to get a recovery than the recovery itself will be what puts the biggest hardship on the ones that utilized those low interest rates. This next time its the Federal government that gets that instead of your average homeowner with an ARM.

[Beet]

I should also point out that the figures don't count for current corporate unfunded pension liabilities. That is another few trillion of debt you could add.

As you well know corporate pensions are being phased out and are not as invincible as their backers understandably insist-- if those corporations cannot pay the obligations they'll simply be defaulted on. Which is unfortunate, but future promises are no the same as present debt.

You must be logged in to read this quote.

I'm not sure if they do, but even if not, I would not be concerned because intragovernmental debts are nonmarketable securities held in government trust funds. They are not traded in secondary markets, so the bond markets have no power over the government's ability to issue them.

You must be logged in to read this quote.

All of which can (and in many cases should) be reduced. Everything you are talking about represent projected future expenditures, far out into the future. This can all be changed. Also, you would have to project out GDP far out into the future, as well as asset price performance, to gauge the true value of these pension investment funds and the like, and no one can predict that, nor can the experts agree on it. I am only talking about real debt levels as they are currently trending. This is not about futures that none of us can predict.

[Beet]

No its the same as after 2001 except on a much more profound level. You get your growth back and the Fed gets a choice of very fast galloping inflation and rampant asset bubbles or raise the FFR in 50+ basis point decisions for many meetings.

And when is this choice of three going to start? We are seeing no sign of either galloping inflation, rampant asset bubbles, nor increases in the FFR rate. So far a lot of your contribution to this thread is saying 'this is going to happen, that is going to happen'. Well it could happen. You will find experts out there who will predict anything. But that's not what I'm saying. All I'm talking about is what's already happened.

You must be logged in to read this quote.

Now you're too steps ahead of me. I haven't conceded an imminent rise in the FFR. As for growth, we've been seeing that (slowly) for a couple of years now and the government debt service is actually down. The only way the government would not be able to cover its debt service as if the coupon payments began to become an unmanageable large percentage of the total budget, as in my exercise in the other thread. Currently the debt service is only around 5% of the budget, so it won't be a problem in the short or medium term. Further, government has the ability to issue its own currency, unlike households (and unlike some countries, lol).

[Wonkish1]

I should also point out that the figures don't count for current corporate unfunded pension liabilities. That is another few trillion of debt you could add.

As you well know corporate pensions are being phased out and are not as invincible as their backers understandably insist-- if those corporations cannot pay the obligations they'll simply be defaulted on. Which is unfortunate, but future promises are no the same as present debt.

You must be logged in to read this quote.

I'm not sure if they do, but even if not, I would not be concerned because intragovernmental debts are nonmarketable securities held in government trust funds. They are not traded in secondary markets, so the bond markets have no power over the government's ability to issue them.

You must be logged in to read this quote.

All of which can (and in many cases should) be reduced. Everything you are talking about represent projected future expenditures, far out into the future. This can all be changed. Also, you would have to project out GDP far out into the future, as well as asset price performance, to gauge the true value of these pension investment funds and the like, and no one can predict that, nor can the experts agree on it. I am only talking about real debt levels as they are currently trending. This is not about futures that none of us can predict.

Of course I well know. But the ones that are remaining are still very, very large and have huge unfunded liabilities. The scariest ones are the multi employer pension plans that are now in a position where if one company goes down all of them go into bankruptcy. They don't officially get defaulted on they get get transferred to the PBGC which is already on a lot of strain and probably can't take much more of a beating without being bailed out by the federal government.


Doesn't mean that Intragovernmental debt isn't debt! It surely is.


Not necessarily far out in the future. Unfunded pension liabilities work today just like public debt does. In order for you to prevent complete and early collapse of the pension you will pay out a portion of current years benefits using the general budget(which is pay-go ponzi style). That is like paying a very expensive debt servicing for the year. And since governments usually can borrow at cheaper rates than the pension assets return these governments just subjected themselves to higher costs of capital. Granted pensions in the future might be easier to restructure than your state issued muni bonds, but that doesn't mean that they aren't debt like in nature.


Actually its easier than you think. The average assumption these pension funds are using today is 8%. I know hilarious right? 8% assumption by owning investment grade paper. Yeah right! And even then they are 50-20% underfunded across the board. Even in the case of Christie's bold action to save the New Jersey pensions that system is still going to be a drain on state and local budgets for many years to come. And you might as well just treat it like debt servicing as they try to play catch up on the sheer amount of the unfunded liability in addition to amount of new contributions to the pension system each year.

[Beet]

Doesn't mean that Intragovernmental debt isn't debt! It surely is.

Not really. One part of the government 'owes' debt to another. Bleh. It's like your checking account owes money to your savings account. Since you, a single entity, are the owner of both accounts, it's meaningless. It's just an accounting entry. That's why claims that the US national debt level is exaggerated when they include intragovernmental debts.

You must be logged in to read this quote.

Well I agree with you on that point. The growth assumptions used by pension funds are the key are they are too high. This will indeed be a problem if they aren't reformed.

[Wonkish1]

No its the same as after 2001 except on a much more profound level. You get your growth back and the Fed gets a choice of very fast galloping inflation and rampant asset bubbles or raise the FFR in 50+ basis point decisions for many meetings.

And when is this choice of three going to start? We are seeing no sign of either galloping inflation, rampant asset bubbles, nor increases in the FFR rate. So far a lot of your contribution to this thread is saying 'this is going to happen, that is going to happen'. Well it could happen. You will find experts out there who will predict anything. But that's not what I'm saying. All I'm talking about is what's already happened.

You must be logged in to read this quote.

Now you're too steps ahead of me. I haven't conceded an imminent rise in the FFR. As for growth, we've been seeing that (slowly) for a couple of years now and the government debt service is actually down. The only way the government would not be able to cover its debt service as if the coupon payments began to become an unmanageable large percentage of the total budget, as in my exercise in the other thread. Currently the debt service is only around 5% of the budget, so it won't be a problem in the short or medium term. Further, government has the ability to issue its own currency, unlike households (and unlike some countries, lol).

Its 2 options not 3. Inflation and asset bubbles go hand and hand.

We saw growth numbers like today in what about 2002? Not a lot of visible bubbles back at that time right? Notice how fast the Fed raised base rates in 2005? Well today the monetary base has been doubled and the amount of leveraging of reserves in the markets today is very, very low. So when the whole Euro, China, Japan, etc. situation passes us and it will, real growth will return. Growth and the velocity of money will go hand and hand when that day comes as it always does. But it doesn't take a rocket scientist to figure out that if you have doubled your monetary base, your M3 is steady, and your leverage of reserves is very low that you will have a large growth in M3 when those reserves start leveraging out.

I'm not calling this situation imminent, I'm not even saying that is likely to happen in the next year or 2, but its going to happen. The sheer size of "stored up future inflation"/aka increase in MB is just to large for it not to.

The government will be able to maintain its debt service. It will just put a lot of strain on the budget though. An FFR increase to 5%+ within 6 years causing just the short term rate to rise to that number will do a lot to change your debt service numbers. Also you can't print currency when your Federal reserve is already trying to raise the FFR to combat inflation and asset bubbles.

[Beet]

Yes, I have seen this prediction before, and I concede that it's a possibility. But I'm not entirely convinced that it will happen. First of all, it depends on the economy returning to expansion such that there is a dramatic acceleration in the velocity of money. If that were to be the case, the economy would be in a better position to absorb fiscal and monetary shocks such as an interest rate rise and budget cuts. Secondly, the Fed says it has other tools to drawn down the monetary base or slow the velocity of money - such as charging interest on reserves, raising the legal reserve ratio, that it can use if it does not want to raise the FFR. But as I said, in your scenario the economy would be booming and would be able to absorb rises in the FFR.

Finally, I think that in some of your comment there's a bit of the old saying 'generals always fight the last war'. In 2002, it was a strange recession because unlike every previous recession, there was no contraction of credit growth. We were actually in a long sustained cycle of credit expansion that started after the 1990-91 recession and continued right through the 'recession' of 2001. And the housing bubble was already visible, with housing prices having exceeded their late 1980s highs (the previous biggest post-WWII housing bubble) by around 2000. Today is different because we are coming off by far the biggest interruption of credit growth (and private sector credit contraction) since WWII. There has been a real private sector debt consolidation, unlike 2001-02 when credit growth continued to charge forward virtually uninterrupted. That said, I can't predict what will happen after a few years. The US economy does have some big structural issues to deal with, a lot of it stemming ironically from the dollar's role as a reserve, which has been both blessing and curse.

[Wonkish1]

Doesn't mean that Intragovernmental debt isn't debt! It surely is.

Not really. One part of the government 'owes' debt to another. Bleh. It's like your checking account owes money to your savings account. Since you, a single entity, are the owner of both accounts, it's meaningless. It's just an accounting entry. That's why claims that the US national debt level is exaggerated when they include intragovernmental debts.

You must be logged in to read this quote.

Well I agree with you on that point. The growth assumptions used by pension funds are the key are they are too high. This will indeed be a problem if they aren't reformed.

I would be inclined to agree with you if intragovernmental debt wasn't at least a portion of upcoming government liabilities. If you were look at the present value of future liabilities it would make intragovernmental debt look puny by comparison. So I think that intragovernmental debt is at least a reasonable compromise between my belief that a present value of all "mandatory" future liabilities should be computed and added vs. others positions that it should only be external tradable debt.


The discount assumption in the pensions isn't only the problem. I mean they are grossly underfunded even with a large discount assumption. Lets also be clear and say that the degree that a pension fund is under funded is the same percentage that the pension fund is a ponzi scheme. So that means that if your pension fund is 30% underfunded than your pension fund is a 30% ponzi scheme and 70% pension and that is at a reasonable discount assumption. If the discount assumption is 8% then you are probably looking at close to half if not more of the pension being a ponzi scheme. So yeah its a mess!

[Wonkish1]

Yes, I have seen this prediction before, and I concede that it's a possibility. But I'm not entirely convinced that it will happen. First of all, it depends on the economy returning to expansion such that there is a dramatic acceleration in the velocity of money. If that were to be the case, the economy would be in a better position to absorb fiscal and monetary shocks such as an interest rate rise and budget cuts. Secondly, the Fed says it has other tools to drawn down the monetary base or slow the velocity of money - such as charging interest on reserves, raising the legal reserve ratio, that it can use if it does not want to raise the FFR. But as I said, in your scenario the economy would be booming and would be able to absorb rises in the FFR.

Finally, I think that in some of your comment there's a bit of the old saying 'generals always fight the last war'. In 2002, it was a strange recession because unlike every previous recession, there was no contraction of credit growth. We were actually in a long sustained cycle of credit expansion that started after the 1990-91 recession and continued right through the 'recession' of 2001. And the housing bubble was already visible, with housing prices having exceeded their late 1980s highs (the previous biggest post-WWII housing bubble) by around 2000. Today is different because we are coming off by far the biggest interruption of credit growth (and private sector credit contraction) since WWII. There has been a real private sector debt consolidation, unlike 2001-02 when credit growth continued to charge forward virtually uninterrupted. That said, I can't predict what will happen after a few years. The US economy does have some big structural issues to deal with, a lot of it stemming ironically from the dollar's role as a reserve, which has been both blessing and curse.

I don't see why you shouldn't expect to see an eventual return to at least near mean growth rates? Monetary policy is my background, I'm 100% positive this will happen.

Not charging interest on reserves that will get money out faster. They instituted the RIR which *pays* banks to maintain reserves. Bernanke has mentioned using that to fight inflation. Let me be clear, the invention of the RIR for use in combating inflation is one of the absolute stupidest and most dangerous central bank inventions I have ever seen. The reason is that they will create a constant feedback loop of being forced to continually raise the RIR to prevent Monetary base from leveraging out(to prevent banks from lending). The problem is that as the RIR gets bigger the size of the MB grows with it as well as the eventual speed at which reserves exit when the Fed finally realizes that the RIR cannot sanely be raised any more. Its like trying to keep water levels down by diverting more waterways to one damn and paying the guy that operates the thing not to let any water out. Well eventually you can't just keep on diverting more and more water and raising and raising the barriers. Eventually when you open it up its going to flood out real fast and there is more of it than ever.

Raising the reserve ratio is a good option, but that only impacts the last inflation inducing leveraged dollars. If you have grown the MB by too much then inflation shows up anyway much before the last 10% of reserves get leveraged out.

The only real option you have is to raise the FFR and to cutoff demand of new debt. And in this case the one that has been most in demand of debt is the US Federal government and its only going to be a budget racking increase in their debt service that will force them to make very, very large spending cuts. So unless the US government has significantly cut spending between now and then they will end up looking like France does today. And the longer the Fed holds off on raising base interest rates the more the US government is incentivized to continue to balloon its debt by acting like debt doesn't matter because of its low cost of servicing. If it goes on for to long then you have a situation where people get scared to raise the FFR because of the possibility that it will cause the debt service to take a huge chunk of the budget and induce a sovereign debt crisis. Then your in a position where the Fed is "powerless" to stop inflation because the consequences of trying to stop it seem too dire.

If you put a gun to my head and told me to pick a date where you see a major federal government budget problem because their cost of capital has skyrocketed I would say 7 years.


P.S. Lets say the government does engage in a lot of spending cuts in the near future and ceases to increase its demand for new debt, that doesn't shut off the flow of credit when reserve leveraging starts occurring again. Lenders go searching for yield wherever they can find it. So if the government stops taking it they will find another borrower one way or another. If you clamp down on mortgage lending(like many on the left think would have fixed the issue in the 2000s) it doesn't stop the problem. The banks will have a replacement group of borrowers within weeks of any regulations being imposed.

You cannot run around trying to plug the asset bubbles loose money creates. It doesn't work. Capital finds a way always. You've got to shut off the demand of credit in its entirety and force losses onto lenders for the flow to stop. That means 1 and only 1 thing, raising the FFR.

And I'm not fighting the last war at all. The situation is very different. Today you have loose monetary policy exploding government and government backed debt. I don't see how that could be more different that the results of loose money in the early 2000s.

[Beet]

I would be inclined to agree with you if intragovernmental debt wasn't at least a portion of upcoming government liabilities. If you were look at the present value of future liabilities it would make intragovernmental debt look puny by comparison. So I think that intragovernmental debt is at least a reasonable compromise between my belief that a present value of all "mandatory" future liabilities should be computed and added vs. others positions that it should only be external tradable debt.

Yeah but what about upcoming government revenues? If you want to forecast upcoming liabilities, then you need to forecast upcoming revenues. Neither of which is present debt. It's not about a 'reasonable compromise', it's just about getting your definitions right. Sure, there are long term budgetary problems to deal with. But you can't use future projections to make statements about current trends, or debt levels. That's fundamentally incorrect.

[opebo]

...So when the whole Euro, China, Japan, etc. situation passes us and it will, real growth will return.

Incredibly optimistic, Wonk.

[Beet]

I don't see why you shouldn't expect to see an eventual return to at least near mean growth rates? Monetary policy is my background, I'm 100% positive this will happen.

I'm not arguing that at all. Well we've already seen a return to near mean growth rates for one or two quarters in late 2009/early 2010, and arguably 2.5% is not too far off from near mean.

You must be logged in to read this quote.

This depends on an ever accelerating real return that banks think they can get out of lending new money out. First of all, keep in mind that a normal velocity of money at normal growth rates usually occurs when the return that banks can earn at the market on investment-grade instruments is about 5% higher than interest on reserves, which has been historically around 0%. Even now, it is only about 0.25%, whereas the inflation rate is running at about 4% CPI YoY, so the real interest rate on reserves is negative, and yet banks are still keeping the velocity of money at a relatively slow pace. So the Fed has a lot of room to raise this interest rate without even reaching a positive real interest rate on reserves. A 0.25% increase in the monetary base is not scary! Nor is a 5% increase.

Now let us take what your logic appears to assume: that no matter how high the Fed pays interest on reserves, the money supply will continue to grow as banks lend out the MB. The assumption you would need to make that sensible is that there would have to be unlimited opportunities in the economy to make 4%, 5%, 6%, 7% real return-- that will always be higher than the interest rate paid by the Fed. If that's the case, bring it on! The economy would be booming, unemployment would plummet to zero, and we would all quickly be rich. Perhaps nuclear cold fusion was discovered and a way was found to quickly mass produce huge amounts of energy from desalinated seawater. Hey, I'm okay with that.

The fundamental reason why I'm not worried about this is that your assumption is that the economy is growing so strongly that the velocity of money not only starts growing at a healthy rate but is spinning out of control. This can always be fixed by contractionary fiscal and monetary policy. The Fed can raise the FFR, and that wouldn't be a problem because the economy would be able to absorb the shock. At the very least, society would be confronted with a clear choice between inflation and unemployment, 1982 style, and would make a choice one way or another.

You must be logged in to read this quote.

The point is that it's an incremental instrument. It's only supposed to affect the money multiplier, and thus gross lending on a marginal basis. But heck, it can be raised to 100%. Banks can legally be forbidden from lending out any reserves, which kills the whole process. I think it's crazy that anyone would be that worried about inflation that we're even talking about this when the money multiplier has been plummeting on its own account. Frankly saying that the sky is falling because the money multiplier is surging is like we're a bunch of hobos sitting under a bridge starving to death, and one hobo comes up and says, "I'm worried that we'll find a pot of gold, for them we'll all become too decadent and lazy!" Well yes, becoming decadent and lazy is one possibility eventually from hobos finding a pot of gold, but it's rather amusing that you are worrying about it now. I'd rather find the pot of gold, thank you.

You must be logged in to read this quote.

Here's the problem with your story again: As soon as the government is forced into a sharp fiscal adjustment that is sharp enough to actually hurt the economy, the rates of return available to private investors outside the government bond market will fall. And then investors will rush back into Treasuries, self-correcting the very problem that caused it in the first place. And the US will never be like France so long as we control our own currency.

You must be logged in to read this quote.

And as I said, raising the FFR would not be a problem in that scenario. You talk like raising the FFR would be the end of the world in and of itself. And note that not all rises in asset prices are as damaging as the housing bubble. Housing was particularly damaging because it involved speculative appreciation based on irrational exuberance by heavily leveraging by far the most valuable asset for US households, which ended up leveraging the central transmission system of capitalism (the banks) as well. Bubbles in things like dot-com stocks, gold, and other commodities aren't so serious. If those guys get wiped out, the impact on the economy is relatively negligible. You do bring up some interesting points however about the inability of monetary policy to target where the money goes in a centralized sort of way. That is where fiscal policy comes in...

You must be logged in to read this quote.

No, it's not loose monetary policy exploding government debt. The economy contraction is the reason why there is such a huge surge in government debt, owing to the collapse in revenues, automatic stabilizers, and other government responses to the economic crisis. There are also the legacy of unfunded Medicare Part D, two wars and huge tax cuts from 2001-2003. Without the Fed stepping in to rescue the economy in late 2008/early 2009, revenues would be even lower and the deficit (and hence the supply of government debt) may well have been even higher.

[Wonkish1]

Yeah but what about upcoming government revenues? If you want to forecast upcoming liabilities, then you need to forecast upcoming revenues. Neither of which is present debt. It's not about a 'reasonable compromise', it's just about getting your definitions right. Sure, there are long term budgetary problems to deal with. But you can't use future projections to make statements about current trends, or debt levels. That's fundamentally incorrect.

Never said you can't forecast upcoming revenues.

A future promise like social security is a debt! And changing the system is restructuring that debt. To the degree that social security wont be able to self fund in the not so distant means unfunded liabilities.

[Beet]

Yeah but what about upcoming government revenues? If you want to forecast upcoming liabilities, then you need to forecast upcoming revenues. Neither of which is present debt. It's not about a 'reasonable compromise', it's just about getting your definitions right. Sure, there are long term budgetary problems to deal with. But you can't use future projections to make statements about current trends, or debt levels. That's fundamentally incorrect.

Never said you can't forecast upcoming revenues.

A future promise like social security is a debt! And changing the system is restructuring that debt. To the degree that social security wont be able to self fund in the not so distant means unfunded liabilities.

Not really. As much as I dislike proposals to reduce social security benefits, they aren't the equivalent of sovereign default. Most young people today have varying expectations about what benefits they'll actually receive.

[Wonkish1]

Not really. As much as I dislike proposals to reduce social security benefits, they aren't the equivalent of sovereign default. Most young people today have varying expectations about what benefits they'll actually receive.

I would agree that they aren't the same thing as a sovereign default. But they are currently marked in mandatory spending off budget. Unless you've come to the conclusion that the system is an easy one to fix politically speaking you should count them as liabilities.

I would personally argue that a company can more easily get rid of its pension with its marked liabilities than the US government can even restructure Social Security and the present value of future benefits are not considered liabilities? Doesn't make sense to me!

[Beet]

Not really. As much as I dislike proposals to reduce social security benefits, they aren't the equivalent of sovereign default. Most young people today have varying expectations about what benefits they'll actually receive.

I would agree that they aren't the same thing as a sovereign default. But they are currently marked in mandatory spending off budget. Unless you've come to the conclusion that the system is an easy one to fix politically speaking you should count them as liabilities.

I would personally argue that a company can more easily get rid of its pension with its marked liabilities than the US government can even restructure Social Security and the present value of future benefits are not considered liabilities? Doesn't make sense to me!

I think this is a semantical question. You've simply inserted into the discussion a factor beyond the scope of the discussion, as defined. If you goal is simply to throw at this thread "more things to worry about" then we can continually add things to the list. The risk of a natural disaster, global warming, rising health care costs etc. etc. etc. Sure, there are an endless number of things to worry about. But if you are talking about the current debt-to-GDP ratio and current household leverage trends, then projections of future net assets/liabilities fall outside the scope of the discussion.

Those are inherently unpredictable and can't be forecast with much reliability. The CBO is best equipped to do so and even it has made epic mistakes. In 2001, the CBO predicted the entire national debt would be paid off by 2010, based on similar 'projections'. Similarly in 1995 the CBO didn't think that the budget deficit would turn to surplus until 2002 at the most optimistic. The debate over the viability of Social Security will continue and there's definitely a possibility that benefits are cut, but the debate is still ongoing and I'd still say that health care costs are a more pressing stress on the budget at the moment.