The Bankwatch

Tracking the consumer evolution of financial services

A scenario where US debt repayment approaches 50% of tax revenue

Reading about the outcome of the G20 Finance Minister meeting in Seoul it is quite clear that while most politicians are not clear on what financial survival means, there is a sense of reality entering the discussion.

G20 shifts from stimulus to austerity in final communiqué | The Times

The G20’s final communiqué introduced a surprise change of tone from the document produced by G20 finance ministers just six weeks ago — a shift for which Britain’s new Chancellor of the Exchequer, George Osborne, was keen to claim credit as he made his debut on the international summit circuit

Just for ‘fun’ and to illustrate the conundrum facing politicians following the last crisis and the probability of the next, lets look at the current currency safe haven, the US.  The average interest rate paid on their T-bills is 0.241%, half what it was a year earlier.

image

Now lets look at the governments debt service ratio.

image

Note that in the period to May 2010 The US Government paid $152 bn compared to $124 bn a year earlier.  The interest paid will include various maturities but if you take the long view you can see where this is headed.

What if the rates the US must pay rose by four fold;  sounds like a large increase but that is only to 1%.  In theory the debt payments could exceed $600 bn.  Now look at the US revenue which must pay the debts.  The US debt repayment in that scenario would approach 50% of revenue.

The deficit of $991bn ( yes 1 trillion) in the 5 months to May must be funded by new Government Debt.  At current rates the new interest on just that trillion is $2.4 bn.  At 1% it is $10 bn more.

Relevance to Bankwatch:

This is far from being an academic discussion.  The implications of currencies and monetary movements caused by the G20 countries as they wrestle with the issues directly impact the issue illustrated above which in turn impact interest rates and inflation or deflation.  That is of interest to us all as consumers, and to banks for the quality, credit and debit of their customers.  This is why I lean on the side of Niall Ferguson, Nouriel Roubini, and John Mauldin forecasts and reality checks.  It is also why it is worthwhile now to take note on the results of G20 meetings which are usually a bit of a yawn.

It also appears Canada is having success in resisting the bank tax for the reason noted on this blog last week.

And the levy could create so-called moral hazard, in that banks would continue the type of risky lending new regulations are suppose to prevent, with the knowledge that authorities have money available to help the financial sector in times of trouble.

(PS … it is nice to see UK getting some decent financial management and leadership back in the form of George Osborne)

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Written by Colin Henderson

June 5, 2010 at 16:34

Posted in Uncategorized

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