Trillions and Trillions: The National Debt and Where It Is Going

There was an interesting article Friday on MSN Money Central. The proposition of the article is that the total cost of the past eight years will be over 11 trillion dollars added to the national debt. This requires the reader to accept some estimated expenses baked in the cake for policy actions already taken. It is generally agreed that to this point, the national debt has increased by some 6 trillion dollars since 2001. The rest of the $11 trillion, according to the Money Central is committed and just not yet listed as paid invoices; the rest is “on the tab”.

This article does not discuss what is likely to happen in the next eight years, but “$1.2 trillion deficits as far as the eye can see” would get us close to another 11 trillion dollars over eight years.

So, the type of analysis presented in the Money Central article implies a national debt by 2017-2020 in the area of $28 to $30 trillion. If interest rates rise, as many feel they must, sooner or later, this will be a tremendous burden. At 5%, this is $1.5 trillion just to service the national debt. And who can say that interest rates could not be higher. The potential exists for interest on the national debt to be larger (maybe much larger) in ten years, than the entire annual deficit is for 2008 or 2009.

This creates massive negative pressure on popular investment themes. Treasuries will be terrible performers over the next ten years under this scenario. Economic growth will be meager or negative during much of this time as private credit is frozen out by massive public credit. If we have rolling recessions or a couple of depressions, gold will not be pushed to valuations that many anticipate. This could be a time of no place to hide.

Readers: Please tell me where and how to be optimistic. I need to hear some counter perspectives.

Comments

[Roger Knights]

You could buy pawn shop stocks, described in an SA article today here:
seekingalpha.com/artic...

Or auto parts retailers (because people are holding onto old cars that need repairs), described about halfway through an SA article today below. (PBY is the most highly leveraged of the bunch.)

seekingalpha.com/artic...

Or consider gold mining stocks, which are undervalued in historical terms in relation to gold, and which are leveraged on the gold price. So even if gold rises only modestly, a miner's ETF like GDX could do well.

Or consider AAPL, which has all the bad news priced in, IMO, and which I think will deliver an upside earnings surprise this Wednesday. (See articles by Turley Muller and Andy Zack in SA on its fundamentals.)

2009 Jan 18 07:21 AM

[Roger Knights]

PS: If you're bearish on treasuries, a fairly safe play would be to short them (buy TBT) and buy junk bonds (JNK), figuring the spread will narrow.

2009 Jan 18 07:25 AM

[Ron Finberg]

The problem with all these numbers is that thet rarely take into account any recaptured profits the Govt may recieve on their investments. The US has taken a path to privatize the nation once again, and in 10-15 years, maybe 20, a truer sense of how things play out will occur.

I just hope they have better MBA's working for them than most hedge funds do.

2009 Jan 18 09:34 AM

[patio]

Possible good news:
- a return to real values, not keeping up with the Jones', a return to savings not debt
- a surge in innovation, to escape unemployment
- conservation of everything, far less waste
- with above, less reliance on foreign oil
- the end of ugly, conspicuous consumption
- communities pulling together to help the needy

The old economy will suck, how will people react? We'll see.

2009 Jan 18 09:44 AM

[Ferdinand E. Banks]

I don't see the problem. Ronald Reagan borrowed like it was going out of style, and all the Republicans who wanted to be president and appeared on TV kept talking about the 'Reagan Revolution' - to include Mitt Romney, who should have known the score.

By the same token, potential lenders don't have a clue. To paraphrase some moron who was in the White House in the last century, the US will always be able to 'hire' the money..

2009 Jan 18 10:25 AM

[kruser53]

patio, you are optimistic. Bless you! IMO, we will get out of this crisis less by government effort and more by the collective individual efforts of those with ambition in the citizenry. My optimism comes from the belief that there are many tens of millions such Americans and more kindrid spirits around the world.

2009 Jan 18 10:54 AM

[sleepless_on_wall_street]

IMO, the most optimistic outcome is inflation. That is a terrible way to be optimistic.

2009 Jan 18 11:53 AM

[D. McHattie]

My money is still in gold and alternative energy.

Obama and congress have a blank cheque from the electorate to spend whatever and however as long as it is in the name of creating jobs.

Also, our memories are still fresh from those high gas prices last summer and we all want to get ourselves off oil, especially foreign oil.

A cornerstone of Obama's economic recovery program will be a wide range of grants, programs and subsidies to encourage the production and use of alternative energy sources. Demand for energy or the price of oil won't even matter if the government is going to pay people to use solar. You could really get homeowners borrowing again if you give them a $5k subsidy and an interest free loan to install solar panels on their roofs.

But all these subsidies for alternative energy (and roads, bridges, state boondoggles) will actually do very little to improve our productivity in the short term (2 years).

The subsidies will, however, increase the money supply and mitigate the reduction of consumption. Gold becomes your safe haven as we all realize that central banks are devaluing their currencies.

Just an opinion.

2009 Jan 18 12:28 PM

[fran]

if you wish to live amongst the growth, go to S. America or Asia. if you wish only to invest in growth, buy commodities[things and companies] and the economies of SA/Asia[select correctly the asset mix]. USA will grow at slooow rates and lifestyles will be modified. circa last half 19th century/20th Brits. life won't be all bad, just different. change is inevitable, but manageable.

2009 Jan 18 12:56 PM

[Steven Hansen]

articles like the money central one you reference mixes so much together including guarantees and backed purchases that it is worthless. similar programs during the depression and the last banking crisis ended up costing the taxpayers little or made a small profit.

having said that, i calculate that the USA has misdirected at least $10 trillion of GDP since 2000 into non-productive avenues.
- $2 trillion for credit based private growth which ended up being phantom growth
- $800 trillion for iraq and afghanistan
- $3.9 trillion for homes built which are currently surplus
- $3.5 trillion of government growth (excluding war)
all these are inflation adjusted chained 2000 dollars. this is 10% of the gdp per year. you cannot throw away 10% of gdp for seven years and not pay consequences ........ like say a big nasty recession.

all this happened on bushes watch. is he responsible? Surely not directly for the majority. all presidents from reagan to bush had some hand in our current mess. and each of the past presidents had their own follies.

what i do blame bush for is having the misplaced theories, the wrong team, and the wrong emphasis on business and the economy. i have watched every president since reagan from a unique perspective - and bush just did not push like the others. to me, it was like he believed everything was going to occur naturally - he did not have to assist.

2009 Jan 18 06:31 PM

[mrresponsible]

I don't think you were asking for individual stocks, ETF's, bonds, commodities, etc. I think this is some of your own information:

Sequential Characteristics of Declines, Bottoms, and Recoveries

Concern - Decline of market over long period of time
Fear - Rapid acceleration in the speed of the market fall
Panic - Massive increases in volume and volatility - like convulsive
seizures when 14 of the 64 days where intraday volatility
is 8%+ ... going back to 1928.
So out of 80 years, over 20% of the most volatile days have come
since October 2008
Shakeout - speculators - everyone gives up - no one is saying it is a
great time to buy
Capitulation - You won't know it when you see it.
The idea of capitulation could be costly as investors wait for a bus that never arrives -
best if you are a long term investor 5-10 years
Geniuses are gone
NBER declares recession is here
"Acceptance" stage of grief
Oversold conditions
Market does not go down on bad news
Cheap is a Price/Earning ratio of 8 (problem 'E' is dropping) with a
Price/Book ratio of less than 1.2 (currently 1.5 S&P)
Trust Building/Hope
Stock market volumes are low after a bottom.
Recovery
Average 1 year return after trough/bottom = 46%
Bounces off the bottom can be dramatic.
1973-75: Stocks up 80% within a year.
1982: Stocks up 65% within two years.
1990: Stocks up 60% in next three years; up 200% by 1998.
2002: Dow up in 2003.

2009 Jan 18 08:38 PM

[fran]

many worthy comments, per usual. my lifetime memories/history track from FDR/HST. each administration since these two has, in historical perspective,contribute... good/bad] to our current dilemmas. only a look back over a longer period will provide the + - for Bushes, Clinton et. al. one could make a case that LBJ/RMN gave us the greatest set backs[unified budget, floating fiat currency, the first escalations of ??? warfare] as well as positives[minority programs, China dialogue]. live with what we have now. let historians debate our recent behavioral impacts.


On Jan 18 06:31 PM The hand wrote:

> articles like the money central one you reference mixes so much together
> including guarantees and backed purchases that it is worthless. similar
> programs during the depression and the last banking crisis ended
> up costing the taxpayers little or made a small profit.
>
> having said that, i calculate that the USA has misdirected at least
> $10 trillion of GDP since 2000 into non-productive avenues.
> - $2 trillion for credit based private growth which ended up being
> phantom growth
> - $800 trillion for iraq and afghanistan
> - $3.9 trillion for homes built which are currently surplus
> - $3.5 trillion of government growth (excluding war)
> all these are inflation adjusted chained 2000 dollars. this is 10%
> of the gdp per year. you cannot throw away 10% of gdp for seven years
> and not pay consequences ........ like say a big nasty recession.
>
>
> all this happened on bushes watch. is he responsible? Surely not
> directly for the majority. all presidents from reagan to bush had
> some hand in our current mess. and each of the past presidents had
> their own follies.
>
> what i do blame bush for is having the misplaced theories, the wrong
> team, and the wrong emphasis on business and the economy. i have
> watched every president since reagan from a unique perspective -
> and bush just did not push like the others. to me, it was like he
> believed everything was going to occur naturally - he did not have
> to assist.
>
>
>
>

2009 Jan 19 07:11 AM

[ArtfulDodger]

Mr. Lounsbury:

To answer your question as to how you can be optimistic:

One way to be optimistic is to ignore such far away prophecies, because most of them are miles off the mark.

Remember in the late `90s when every economic prophet told us the government would have surpluses from there on out?

Then came 9-11.

These people can't predict next week, much less 2030.

I would ignore the whole thing and bear down and try to invest for this coming year.

2009 Jan 19 08:29 AM

[Jason Rines (iThinkBig)]

Excellent Patio. The next Bull will be in 2013. It will be very tepid compared to the 80's and 90's. We'll all have to do what we do best as investors again. Conduct endless due dilligence on specific companies, management and cashflows. I am 38 and am pissed for the decision-making the last decade. But guess what? I am finding very interesting ways to make money on the bull, on the bust and I am sure in the lackluster recovery decade(s). I have real concerns about geopolitics a few years fron now, but I no longer lose sleep over it. We're going to have some real rough seas but this is an end of an era and a start of a much brighter one then man has seen these last 10,000 years.


On Jan 18 09:44 AM patio wrote:

> Possible good news:
> - a return to real values, not keeping up with the Jones', a return
> to savings not debt
> - a surge in innovation, to escape unemployment
> - conservation of everything, far less waste
> - with above, less reliance on foreign oil
> - the end of ugly, conspicuous consumption
> - communities pulling together to help the needy
>
> The old economy will suck, how will people react? We'll see.

2009 Jan 19 09:42 AM

[mallarde]

I am pessimistic about the amount of poverty we have absorbed from Latin America and beyond. How much does it cost to provide education and health care to these willing "workers"?

You have to travel to certain parts of the country to see the amount of poor from the South, but it will burden the federal government and it will spread to unaffected states.

California will become a third-world republic. The rest of the country will follow the same trend, only not nearly as pronounced.

This in combination with our failure to protect American wage-earners will drive us further in the wrong direction. I see no room for optimism.

2009 Jan 21 10:00 PM

[Jake Berzon]

A trillion here, a trillion there and soon we are talking some real money...
Of course this will eventually result in inflation picking up and nobody is pretending that this will not happen. The question is only "when?" Hopefully, that will be the worst outcome of the actions our governement is taking to combat current problems.

2009 Jan 23 11:57 AM

[John Lounsbury]

Jake - - -

Good comment. A lot of us are trying to figure out the "when". The answer seems simple at first and then you think of the last 15 years in Japan and realize the answer could be very complex.

Thanks for reading and sharing your thoughts.

2009 Jan 23 12:40 PM