Don’t Worry About The Debt Tsunami (Part II)

Last week I wrote that the forward calendar of to-be-issued government and mortgage related debt isn’t going to swamp the economy.

Since I wrote my article, Paul Krugman wrote an article citing research done by Brad Setser that supports my thesis. Setser’s analysis predates my article and is really high quality work.

I am certain that Krugman didn’t have any idea what I wrote when he published his article but, just the same, Krugman’s subsequent writing is a helpful addendum to my “why not to worry about the debt tsunami” theme.

Basically, according to the analytical work done by Setser, the amount of public borrowing is being offset by a fall off in private borrowing. Less private borrowing is another way of saying that the savings rate has risen. Below is a graph from Setser’s article illustrating how the rise in government borrowing is more or less being offset by a drop in private borrowing.

Krugman concludes “We’re actually borrowing less from foreigners than we were before.”

Setser, on the other hand, worries that “…the challenge…will be to bring down the government’s borrowing as private borrowing resumes.”

Comments

[John Lounsbury:]

Mark - - -

I like balanced logic (recognizing both pros and cons) and you certainly exhibit that when the title of this article is compared to the final statement: “…the challenge…will be to bring down the government’s borrowing as private borrowing resumes.”

Let me make the following observation:

The "Debt Tsunami" has no chance of becoming nothing to worry about if we don't worry about it now. We have drastic fiscal and monetary measures underway. We need an exit strategy and it is not evident that there is one. In the spring of 2008 we started flying by the seat of our pants; we appear to be doing exactly the same today. This may be appropriate for a small airplane with a skilled pilot, but is it the right thing to do for the largest aircraft in history with crew that has never flown this way before?

Jun 09 12:41 PM

[John Lounsbury:]

Mark - - -

In spite of my critical comments, you are to be commended for bringing this topic up for discussion, because, as you have noted, there is a vigorous debate going on. I am disappointed there are not more comments here as yet.

Jun 09 12:43 PM

[CautiousInv...:]

I read Stetser's piece and I believe his thesis is correct but when you start putting number to it gets scary.............because there is nothing left for corporations and households.

If we look at recent years, it's reasonable to say our credit markets facilitated on average around $3.5 trillion in lending; if we pull out foreign creditors who cover the current account deficit, this amount is reduced to around $2.8 trillion.

During FY 2009 Treasury is budgeted to borrow $1.8 trillion but because of overruns and falling tax revenues the amount could exceed $3 trillion, according to Goldman. Next year the budget is $1.4 trillion and this could easily creep up to $2.0 trillion or more.

If we take the capacity of the debt market as being fixed, then in FY 2010 there will be around $800 billion available after Treasury has left the debt trough. Excluding consumer borrowing, normally financial and non-financial corporation borrow around $1.5 trillion.

The real problem, though, is we don't know the needs of the private going forward and we don't know what real Treasury borrowing will be because of uncertainties about economic growth, tax receipts and interest rates.

Jun 09 01:30 PM

[PainfullyAware:]

I am not worried about Government "Borrowing" So Much As I AM WORRIED about the influence on society when the bills come due and there are not enough producers to pay.

Government Expansion is curtailing productivity and in some cases taking control of Industry.

Can Government Tax Government To Meet Its Revenue Requirement? The Government appears to be the segment of the Economy adding jobs at the highest rate.

One Pixel Does Not A Picture Make.

Jun 09 05:46 PM

[yellowhoard:]

The government seems to be assuming that they will not crush economic activity when they raise taxes to extraordinary levels.

Tax revenues will plummet as the economy slows and rates go higher.

Jun 09 06:02 PM

[Living4Divi...:]

agreed

On Jun 09 06:02 PM yellowhoard wrote:

> The government seems to be assuming that they will not crush economic
> activity when they raise taxes to extraordinary levels.
>
> Tax revenues will plummet as the economy slows and rates go higher.

Jun 09 06:04 PM

[Living4Divi...:]

QUOTE: "Krugman concludes 'We’re actually borrowing less from foreigners than we were before.' "

Is it that we are borrowing less or is that the Foreigners are less willing to lend to us?

Jun 09 06:08 PM

[doubleguns:]

Household borrowing being offset by govt borrowing.

Has no one asked why would we take rediculously high levels of consumer borrowing and replace it with rediculously high levels of govt borrowing.

Two wrongs dont make a right here.

I vote for no rediculous borrowing by either.

Lets get back to being responsible!!!!!!

Jun 09 06:16 PM

[Between The...:]

Most everyone would agree that the private sector borrowing was an unsustainable bubble that needed to be curtailed. If the sum of government and private borrowing does not contract significantly to a reasonable level over the near and medium term, then I will personally be worried about the debt tsunami. Japan ran a similar playbook of private borrowing plunging and government borrowing spiking, but the result was economic stagnation as the returns to society of government spending was very poor (think bridges to nowhere). However, their society, currency, and way of life didn't collapse due to these behaviors, so at this point I might be tempted to take it.

Jun 09 09:10 PM

[ngwun:]

"Tax revenues will plummet as the economy slows and rates go higher."

Read somewhere that accumulated corporate losses will wipe out a large % of tax revenue for the next couple of decades?

howard ino.

Jun 09 09:30 PM

[Gregman2:]

We are borrowing less because there's less to borrow. And less ability to repay, and hence borrow...to buy.;-)

Jun 10 12:31 AM

[User 305589:]

The fascinating aspect of this analysis is that there seems to be just one primary worry: Will there be enough lenders to supply the funds that are needed (i.e. will be borrowed by the govt). Well, depending on the interest you pay, and given the amounts involved and given the size of the global economy and global savings there will not be a shortage of funds to borrow anytime soon. The question is, what interest will have to be paid to attract these funds. And linked to that is the REAL important question that needs to be asked and answered:
Will the govt (i.e. the national economy) ever be able to sustain these borrowings, earn the interest that needs to be paid and eventually reduce the principal outstanding? or will it just be an ever escalating accumulation of debt?
I cannot give a complete answer, but an hint what I see evolving:
GDP has already grown less with each additional dollar borrowed in the past, as has been well documented by various authors. At last count, some 4+ additonal dollars were needed to be borrowed to create one dollar in additional GDP, usually this was mostly additional personal consumption. of course, that one dollar through taxes (on incomes and corporate profits) extracted from it cannot sustain the interest burden imposed by the $4 that were borrowed to create it. So with every dollar borrowed AND SPENT THE WAY IT HAS BEEN SPENT OVER THE PAST DECADE the hole gets digged deeper and deeper until tax collections do not even equal required interest payments by the govt. game over.
Unfortunately, the big money right now is just thrown at the banks and at consumption subsidies (tax rebates, car rebates, house rebates, mortgage subsidies). If the obama administration continues this way, the country will slide deeper and ddeper into the hole. If they woulkd turn around and started to use the moeny instead much more for real investment (infrastructure, environment, clean energy, energy preservation, education etc.) then there is still a chance to sustain even the higher debts. Unfortunately, this so far is not the case. The investment spending proposed by the administ´ration fall way short of what is needed. Instead, the focus is on saving wallstreet and the banks.
If this course doesn't get reversed veryquickly, then at one point in the not tto distant future any discussion about whether or not to worry about sufficient funds available to borrow from, will become moot.

Jun 17 01:23 PM