2011 February 18 Friday
US Government Interest Payments Set To Soar

US federal interest payments per person are set to triple.

Interest payments on the national debt will quadruple in the next decade and every man, woman and child in the United States will be paying more than $2,500 a year to cover for the nation's past profligacy, according to figures in President Obama's new budget plan.

If you are among the ranks of net taxpayers (paying the government more than you get back) then your cost for servicing the debt will be much higher than $2500 per year. Higher earners will have to pay for most of the debt interest. Expect higher taxes.

That $2,500 of interest per resident (not just citizens) is most likely on the low side. Mainstream economic models of future US economic growth are still too optimistic. There's still the assumption of a return of "normal" growth rates. It will take some more years of economic growth that is below the growth rate of the last hundred years before economists fully accept that fundamentals have changed in ways that lower potential growth rates. So disastrous projections of future government deficits and interest payments still are unrealistically optimistic.

Ken Rogoff gets that we are not growing fast enough. Without high economic growth governments can not pay what they've promised their growing elderly populations.

"We're running a gigantic deficit, and we're not growing very fast," said Kenneth Rogoff, an economics professor at Harvard University and former chief economist at the International Monetary Fund. "We're on a dramatically unsustainable path."

That we are in an extended period of slow growth is beginning to sink in with some economists. I encourage you to read Tyler Cowen's new Kindle book (a mere $4) The Great Stagnation: How America Ate All The Low-Hanging Fruit of Modern History,Got Sick, and Will (Eventually) Feel Better. Tyler says the rate of innovation is too slow to enable fast economic growth. The fundamental innovations (e.g. the discovery of the transistor) are not happening often enough. So too much of our innovations come from refining technologies. There are diminishing rates of return from refinement. Economic growth suffers.

I think our prospects for economic growth are even worse than Tyler foresees. Our demographics are deteriorating. On top of that, I expect Peak Oil will cause an extended period of outright economic contraction. Replace economic growth with contraction and government deficits balloon out of sight and interest payments soar. That's the prospect we face.

Much like Ireland, Greece, and other basket case European countries the US faces a considerable risk of hitting a breaking point where the accumulated debt causes investors to dump sovereign debt as too risky. Then a vicious cycle will set in where interest rates soar, making debt service cost more than government services. The US government will be tempted to use hyperinflation to inflate away the debt mountain.

Update: How can we reach the disaster point? What would do it: Another recession while the US deficit is already huge going in. That's not as far off as it might seem. A big oil price spike will push the US economy back into recession. We are closer to recession-causing high oil prices than it seems when watching US financial news reports on oil prices. The widely quoted West Texas Intermediate crude oil price in Cushing Oklahoma is much lower than the average global price of oil.

The spread between West Texas Intermediate crude oil for delivery at Cushing, Oklahoma and comparable oil for delivery almost anywhere else in the world has surged to record levels. The discount of WTI to Brent hit a previously unfathomable $18.50 a barrel as Brent crude traded at $103.93 per barrel, up $2.29, while NYMEX WTI traded at $85.43, up only $1.11 a barrel. (WTI has historically sold at a dollar or two premium to Brent, which is a slightly heavier and more sour blend.) Clearly there is a supply/demand imbalance at Cushing, Oklahoma not replicated elsewhere in the world, and specifically not replicated anywhere you can just put oil in a tanker and send it to China.

Developments in northern Great Plains and Canada have made Cushing prices much lower than prices on the US East and West coasts and the rest of the world.

Increased flows from Canadian tar sands and the Bakken shale fields in the northern Great Plains have sent oil flooding into Cushing, Okla., where the WTI crude contract is priced. But because pipelines are set to run into Cushing, not out, much of that oil is going into storage rather than into refineries. Oil stockpiles in Cushing hit their highest level in seven years last month.

The glut has disconnected the widely quoted WTI market from a sobering energy market reality. "Cushing isn't worth looking at," says Steve Kopits of energy forecaster Douglas Westwood in New York.

The US government (and other Western and East Asian governments) will not be able to afford fiscal stimulus in the next recession. We will go into the next recession with much higher deficits, much higher debt, and much higher unemployment rates. In the next recession governments will cut spending, not increase it.

Share |      By Randall Parker at 2011 February 18 10:08 PM  Economics Sovereign Crises


Comments
A.Prole said at February 19, 2011 2:12 AM:

Economics 101:

Economic growth - dependent on growing per capita output of workers.
Per capita output of workers - dependent on productivity of workers.
Importing low grade, low wage immigrants by the million - pulls down productivity and per capita output, hence pulls down potential growth rate.

Not exactly rocket science, is it?

A.Prole said at February 19, 2011 2:16 AM:

Anyway, Tyler Cowen is talking shit.
The whole big idea behind 'globablisation' was that once low wage, low capital economies were 'opened up' they would afford a market for hi-tech, capital intensive American machinery, thus ratcheting up American productivity levels and incomes.
For some reason, this never happened.
But the Germans and Japanese pulled this trick off though.

Eggwhite said at February 19, 2011 2:20 AM:

Great post. This is the sad prospect that faces America and the root cause is demographic changes, specifically changes in terms of ethnicity. If we were still a culture that valued innovation and technology we could still look forward to growth. But something is happening in America, we are becoming more of an Afro/Latino culture. If Man is to continue making great strides in the future, it will have to be somewhere else, and I don't know where that is. Germany perhaps?

bbartlog said at February 19, 2011 6:21 AM:

Mostly this is just another argument for some sort of crisis. First of all, the Fed is already paying these bills for us, buying up our own debt fast as they can get away with. Second of all, what can't be paid, won't be paid. It will not play out with the American taxpayer paying the additional amounts you describe, unless you mean by way of inflation-as-tax.

bob sykes said at February 19, 2011 6:31 AM:

Actually, it has been argued that American exceptionalism is due entirely to its Anglo-Saxon founders and their culture. American decline supposedly set in when the Germans and Scandanavians began to immigrate, bringing their nascent socialism with them, and it accelerated with the immigration of the Irish and then southern and eastern Europeans.

As to innovation, I have not yet read Tyler, but some historians of technology maintain that there has be no fundamental innovation in technology since 1970. You might notice that Moore's law (cpu speed doubles every 18 mo.) ended maybe 5 years ago. If it still applied, we would have desktops with 20GHz processors, not 2 to 3 GHz.

Sal said at February 19, 2011 10:58 AM:

American decline supposedly set in when the Germans and Scandanavians began to immigrate, bringing their nascent socialism with them, and it accelerated with the immigration of the Irish and then southern and eastern Europeans."

Can't speak for Karuts and nordics, and yes, in my view the Irish are fucks, but I've never met a southern (WOP) or eastern european (Polack) who have been fucktard liberals. Plenty of Anglo Saxon types are the problem, let me tell you...

bbartlog said at February 19, 2011 11:40 AM:

'American decline supposedly set in when the Germans and Scandanavians began to immigrate'
But the Germans have been here a hell of a long time. Ben Franklin was already complaining about them in the late 18th century, and they founded various communities all throughout the 19th century. Now I agree that the strain of utopian socialism that runs through their culture is problematic, most of all when someone tries to export it (or promote it on the national scene); however it's a bit of a stretch to say that the decline set in when they *began* to immigrate, unless you're one of those guys who thinks that the real free America ended when Washington put down the Whiskey Rebellion. Thing is, while you can certainly argue that their ideas are problematic, they have not generally been great activists in promoting them to others. That role is filled more by liberal Anglos, or Jews. Now if you want to argue that socialist ideas would have fallen on less fertile ground, absent the German and Scandinavian immigrants, that's certainly fair. But I actually think the problem is more that they end up serving as a misleading example of what socialist policies can achieve. Someone who tries to export their models to other cultures and peoples without understanding the forces that make them at least sort of work will cause a lot of problems.

Z said at February 19, 2011 11:58 AM:

A few points in rebuttal:

1. The US debt to GDP ratio is less than half Japan's, which has persistent deflation and whose government borrows billions every year for 1% and less.

2. China has a much higher rate of inflation than the USA, despite following the mercantilist ideal of huge trade surpluses and very little public debt.

3. There are several big demographic trends going on right now.
(a) mass immigration of 90-IQ latin americans (the momentum for which is falling as birth rates in donor countries plunge)
(b) lower but still substantial immigration of 105-IQ NE Asians, 115+IQ elites from countries like India and Venezuela, and ~100 IQ people from Eastern Europe, Vietnam, and the Philippines
(c) higher birthrates among low-IQ women, though this does not seem to be the case among low-IQ men
(d) assortive mating leading to a much larger fraction of high-IQ individuals

I am not convinced as you are that the dysgenic effective of a and c outweigh the eugenic effect of b and d. d does not increase mean IQ, but it does mean a larger percentage of the population that is highly intelligent and should also result an a huge increase in the absolute number of people with IQ's above 160 or so.

Longer term, the propensity for high IQ people to have small families will evolve away as people who are disposed to use birth control die out. Further, we already are aborting something like 90% of Down's Syndrome children away and reduced Tay-Sachs cases by 95%, greatly reducing the number of retarded children born each year. Meanwhile sperm banks allow certain women do select for very intelligent fathers.

I predict in less than 10 years parents will be able to use IVF screening to select embryos such that only those with high IQs and with other desirable features are implanted.

Z said at February 19, 2011 12:08 PM:

"You might notice that Moore's law (cpu speed doubles every 18 mo.) ended maybe 5 years ago."

This does not matter. CPU _clock speed_ no longer increasing does not mean that computer CPUs are no longer getting faster. The Intel Core i7 _3.2GHz_ (late 2010) is about 10 times faster in actually running software than the Intel Pentium D _3.60GHz_ (mid 2006).

You can also get many times the hard drive space and twice as big an LCD for less than you paid before.

Randall Parker said at February 19, 2011 12:13 PM:

Z,

Japan is an outlier in its ability to handle a huge sovereign debt. Other countries implode well below 200% of GDP total sovereign debt. Look at Greece, Ireland, Argentina, and many other examples.

China's inflation rate: I am not clear on how this is relevant. Yes, China's fiscal and monetary are too expansionary. Yes, that's causing them problems with inflation. But why does this mean the US will be able to handle very high debt? Fact is, hundreds of billions per year spent on debt service is hundreds of billions not spent on defense, Medicare, Social Security, and other major existing programs.

US demographic trends: We also have an aging population. So a the number of dependents per worker is rising. These are not chosen dependents like babies are. These are strangers who we support thru higher taxes. Taxes are disincentives to working unlike the desire to make more to spend on the kids and house.

IVF screening for eugenic purposes: Yes, I've been predicting for years on my FuturePundit blog this will happen. But I also point out the time lag from initial embrace to widespread embrace to significant impact on the labor market. Substantial labor market impact of eugenic IVF embryo selection is probably 35-45 years out. How long after the substantial impact before eugenic IVF reverses the effects of dummies outbreeding smarties? 50 years? 60 years? A long time.

Z said at February 19, 2011 3:06 PM:

RP,

All three examples you use made the mistake linking their currencies to foreign currencies, the German-dominated Euro in the case of Greece and Ireland and the very strong US Dollar of the 90's in the case of Argentina. Ireland also made the huge mistake of assuming the debts of its oversized financial sector.

We also don't need to engage in hyperinflation to greatly reduce the real value of debt. Reagan-era inflation of 5.5% for 5 years will reduce the real value of the national debt by 31% or $4.34 trillion. It will also fix the public pension problem. The real value of the defined benefits will fall and the assets of the funds will increase. Capital gains taxes will go up. I don't see a return to inflation at these levels as a bad thing at all.

Finally, the huge college and professional school debts many bright young people have would be decreased on a real basis. The burden of such debt is dysgenic.

The aging population issue will eventually wear itself out in the US as our birthrate is near replacement and life expectancy isn't increasing all that fast.

In summary I am not as pessimistic as you about most of these issues. I think our big crises is medicare/medicaid, wasteful wars and defense spending, wall street corruption, and mass immigration of low IQ populations. As bad as these things are, there are still many positive trends in the country like fall crime rates.

"Substantial labor market impact of eugenic IVF embryo selection is probably 35-45 years out."

I'd say that if IVF in 15 years triples the number of very high IQ babies, we'd start seeing the impact of this only 20 years later. The positive benefit of the children of the first round of assortive mating, who were generally born 1975-1985, is only now starting and will increase each year. I am in my early 30's and in excellent health so while a long way out I do care about the state of the world in 2045.

3 strikes said at February 19, 2011 4:24 PM:

In summary I am not as pessimistic as you about most of these issues. I think our big crises is medicare/medicaid, wasteful wars and defense spending, wall street corruption, and mass immigration of low IQ populations. As bad as these things are, there are still many positive trends in the country like fall crime rates.

5 to 1. You lose...

PeteR said at February 19, 2011 9:32 PM:

Regarding eugenic IVF techniques -- sure it will help to increase the percentage of intelligent and healthy white babies, but what do we do about the fact that the poor/low-intelligence/brown/black population demographic starts reproducing in their teens and tends to have twice as many? Plus, they'll be capitalizing on the medical advances created by us to further increase their own fertility.

Randall Parker said at February 20, 2011 3:48 PM:

Z,

So you accept 15 years until lots of smarter babies and then 20 years more before they start to enter the labor force. So 2046 at the earliest before things start to improve. In the mean time things go down.

Moderate inflation: The US government reduced the average maturity of issued treasury bonds during the GW Bush Administration in order to reduce interest costs in the short term. That means that a bump up in inflation will translate more rapidly into higher interest rates in debt issued by the US government. This reduces the ability of the US government to inflate away the debt.

I would like to hear about more positive trends you see.

About processor clock speed: The increase in number of cores does not do as much to speed up overall through-put because it is hard to parallelize algorithms. The multi-core architectures work better on servers where lots of requests can be processed in parallel.

Engineer-Poet said at February 20, 2011 9:02 PM:

Eugenic IVF will start having impacts on social costs pretty quickly.

  • Public schools, within 10 years.
  • Juvenile justice, 10-15 years.
  • Social services for teen pregnancy and drug use, 15 years at the outside.
These cost reductions keep cascading, and continue as the population graduates from school to work earlier.

no i don't said at February 21, 2011 2:17 PM:

It's amazing how much we talk about what we don't know:

Irish being described as "fucks"; dummies blaming U.S. problems on Anglo-Saxons, Irish, Eastern Europeans, Latin Americans, and so much talk about I.Q. without even knowing the difference between intelligence and reason.

So much for those I.Q. proud dogmatic idiots who are uncapable of simple abstract thought.

Check It Out said at February 22, 2011 2:42 PM:

I like Germanic people. They're smart. There's just something about that region that produces really intelligent people.


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