Wednesday, April 20, 2011

The Path to Infinite Leverage v.2

First start with the exponentially declining yields on treasuries.

That's an exponential trend line in the chart and as you can see it matches the data very closely.

Now let's look at the exponentially increasing debt of domestic nonfinancial sectors. The data was discontinued in 2002 but I think it is close enough for government work.

Now let's estimate what the interest payments on that debt would be if the rate was comparable to the yield of 10 year treasuries.

Now let's adjust it for inflation over the years.

What do you know? Thanks to exponentially decreasing interest rates, we can continue to borrow exponentially increasing sums of money with absolutely no consequences. Therefore, let's assume all trends remain in place to the year 2050.

Should I start learning Japanese now or should I wait?

Perhaps I should start now just to be on the safe side.

On the other hand, perhaps all trends will not remain in place to the year 2050. We might not be that fortunate. I do not claim to know what the future will bring. I am simply trying to point out that we have been on the path to infinite leverage. How long this can continue is anyone's guess.

One should also keep in mind that I have cherry picked the starting point of these charts to the year 1982. That alone should be reason to suspect that these trends may not stand the test of time.

See Also:

The Path to Infinite Leverage

Source Data:
FRB: Selected Interest Rates
St. Louis Fed: Debt of Domestic Nonfinancial Sectors
St. Louis Fed: CPI


nanute said...

I don't know about learning Japanese. I think the data would suggest not investing in Treasuries?

Stagflationary Mark said...


The exponential fall in 10-year treasury rates has been going on for three decades. It is certainly possible for it to continue for another decade. If it did, then today's 10-year treasuries would be more of a bargain than they would appear.

I bring Japan up because their 10-year yields just 1.24%. They can't seem to free themselves of the deflationary pressures. Maybe we will struggle too.

What will interest rates and the price of oil do if the global economy slides back into recession a few more times over the next decade? It sure would be helpful to know the answer with certainty.

I do remain stagflationary over the long-term though. I'm mostly a believer in the slowing growth part. I am less certain of the high inflation part. I don't think the deflationary pressures are gone.

Anonymous said...

What will interest rates and the price of oil do if the global economy slides back into recession a few more times over the next decade? <<

The stock and commodity markets are now dominated by ETFs. By law these ETFs must create new shares and buy the underlying assets when demand is great. Conversely, if demand goes away, they must destroy the shares and dump the underlying assets on the market. We saw the dffect on prices in late 2008 and early 2009. ETFs dominate the market even more now.

When you get extreme moves in an asset like silver in the chart, you will get even more extreme moves in the unwind when ETFs are destroying shares. Can't say when this will happen for sure, but when you consider we are now in the silly season when all the newly ordained silver bull investors are flocking to a sure thing, the time may soon be coming for the other side of the mountain.

Eric Burdon and the Animals had many hits mid century last, including the national anthem of US troops in Vietnam--"We gotta get outta this place." One of their little know songs was "Sky Pilot" and it featured the line "how high can he fly." While it was about military chaplains, it might be more aptly tagged to newly coined silver bulls these days.

Thanks for your blog!!

Stagflationary Mark said...


From Hussman:

The risks in precious metals are clearly increasing.

There's more. Well worth a read.

Glad you like the blog. :)

Troy said...

yeah, I'd graph CMDEBT on the st louis fred site:

and marvel at the exponential nature, but when you divide that graph into 10 year chunks it looks linear, except the 2007-2010 period, of course.

We doubled consumer debt between 2002-2007, and we're probably not going to double it again for some time.

Government debt is taking the place of this consumer debt, and that will probably continue for a long time.

The central thing I don't understand is total government spending (excluding social security) is $5.2T or thereabouts.

That is $45,000 per household. At $90,000 per job, that is one government job per 2 households.

I think taxes are way too low now, but I also think this is not remotely sustainable.

This is not even with the two factors most on my mind, the 80 million baby boomers approaching age 65 and the end of cheap oil.

nanute said...

Those 10 year treasuries (current), might be a bargain. That's assuming that inflation, at some point, doesn't erode the value. Granted, inflation does not look like a problem, near term. Unfortunately, I believe that inflation is going to be necessary to get the economy/jobs picture to improve. Japan is stuck on red, primarily because they are not spending, and are a net exporter.


mab said...


Your math is very similar to my (Japanese) math. Don't tell Denninger though. He's CONvinced that the bond vigilantes will show up and institute "free" market discipline. Denninger's "simple" math is beyond me.

Stagflationary Mark said...


I would have preferred to add up all the debt, but I settled for a series that offered monthly data to reduce the amount of work I would have to do.

The CMDEBT chart is a sight to behold. I stare at that one often. Sigh.

Stagflationary Mark said...


I'm of the belief that inflation won't help us any better than it helped us in the 1970s.

Stagflationary Mark said...


If we buy the argument that our heavily leveraged system cannot tolerate high interest rates, then we must also think Japan's situation might be something we cannot avoid.

15% interest payments on my home at its current price (and/or any future inflation adjusted price) would require an amazingly large wage income stream.

Troy said...

I think 1970s - 1980s debt was an artifact of the baby boom turning 30, actually.

These new adults largely found productive work to do, so the credit they exercised was not "bad", even though it janked up the velocity of money and had knock-on monetary expansion effects.

The 2010s are a different story I think, partially if not largely thanks to globalism changing the rules for the working class here in the US.

Troy said...

hen we must also think Japan's situation might be something we cannot avoid.

This is obvious with our soon-to-be $10T of debt held by the public. I call it a mexican standoff between bond buyers, government, and the taxpayer.

Domestic bond buyers have 2 choices: buy debt or be taxed the same amount. Not sure what's up with foreign holders . . .

Stagflationary Mark said...


Productive work is certainly harder to come by.

Perhaps foreign holders see the grass greener here and we see the grass greener there.

I smell a giant septic tank straddling the fence. Sigh.

nanute said...

Domestic bond buyer have 2 choices: buy debt or be taxed the same amount. Why is that true? It is quite possible that buying the debt could prove more costly in the long run.

nanute said...

It would take an extreme amount of inflation to get to interest rates from the 70-80's. With current short term rates near zero, I doubt that level of inflation is to be expected. Remember that link to Vickrey on the 15 fatal fallacies of financial fundamentals? Read the argument regarding inflation and employment. That's what I am arguing for.

nanute said...

Hope this isn't a double post. I don't see any real prospect of 70-80's inflation/interest rates under current conditions. Short term rates are near zero. Remember that link to Bill Vickrey's 15 fatal fallacies of financial fundamentals? Check the point about inflation and employment. That's the type of inflation I'm arguing for.

Troy said...

>Domestic bond buyer have 2 choices: buy debt or be taxed the same amount. Why is that true?

Cutting spending is tough, as is raising taxes on the middle class and below, only because home prices have adjusted to current after-tax incomes.

I didn't understand it 10 years ago, but cutting taxes in 2001-2003 was utter folly -- homes prices just went up in response. This is obvious to me now, but the importance of land economics is not obvious at all, especially before the big bubble of 2003-2006.

getyourselfconnected said...

Great post Mark, plenty to think about.

Stagflationary Mark said...


Sorry it took me so long to notice your comments were flagged as SPAM.

This SPAM detector stinks. It has been false alarm after false alarm.

Like you, I do not think that we will see 70-80s inflation/interest rates any time soon.

If we did see 70-80s inflation/interest rates then I would be less interested in holding TIPS, if only due to the heavy taxation on the inflationary gains.

Once again, owning TIPS is kind of like owning fire insurance on my home. I do not expect my home to burn nor do I even root for it.