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« In Memoriam and Eternal Gratitude | Main | Ruminations – 26may2009 (updated) »

26 May 2009

Comments

Wayne Hullett

If you have access to the data, it would be useful to see what the numbers for the previous 5 or 10 years would look like on this spreadsheet, as a validation of your model.

Fred Buhler

While I agree that our focus should be on national debt service to GDP, it is also important to understand the structure of maturing debt. When does it mature, who is holding our paper, and are they likely to refinance it? In the past, as debt has matured it was easy to refinance it with a new issue; in effect roll it over. However, as some of our key creditors, read China, are less inclined to continue purchasing our paper at current levels, there is a strong probability that we will have to pay some of this paper off. Or dramatically increase the yield, to make it more attractive. Either scenario is unattractive.

George Rebane

Wayne, I'll look for such numbers and hope that you will too. The model, of course, is a 'toy model' - reality will be more complex as I mention in the post. But even this model, on the face of it, contains the major financial factors that determine the impact that national debt will have on a country with the user input GDP growth rate and aggregate tax rate.

Fred, I agree with your finer points. Those factors can be represented in this simple (i.e. 'toy') model by appropriately modifying the interest rate that is needed to service the riskier loans that will be made to us. As an international banker, you could probably enlighten us with how our vaunted 'risk free' interest on Treasuries will be affected as our debt service to GDP ratio grows.

Fred Buhler

Interesting point. And of course, Treasuries are always referred to as the "risk free" basis for pricing other transactions. However, I have always argued there is no such thing as "risk free". Whether it is default or pricing related risk, there is always risk. Similar to our state, as the perception of risk increases, so the pricing increases.

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