Tuesday, November 29, 2016

We grew up in Magical Times

The great expansion started in 1981.  Alan Greenspan called it the start of the Great Moderation.  Public debt went from $4,069 per person to $59,874 per person by June 2016.  So much income and wealth accrued during this period of time.  It was Magical Times for us.

Here is how the credit Magic works.  Say you have debt of 1 million dollars and you have to pay 10% interest per year.  The interest expense to you is $100,000 per year.

Then interest rates decline to 5%.  So you borrow another 1 million dollars for a total of 2 million dollars owed and the interest expense is still $100,000 per year.

Then interest rates go to 2.5%.  So you borrow another 2 million dollars for a total of 4 million dollars you owe.  But the interest expense is still $100,000.

By G_d, that is Magic.  So much money over the decades for so little interest expense.

Chart: public debt per person. Click to enlarge.

A note on the presidents as shown in the chart.  I am not being partisan in any way.  Each president just goes along with what the Force of the trends dictate.  They are victims of what went before, and powerless to change anything.

In the Middle Kingdom, magic existed among sorcerers.  But things changed and magic withered away as people stopped believing in it.  If President Trump reduces the increase in debt, it will be because nobody believed in Magic any longer.

Maybe we can get to $100,000 of public debt per person within the next decade.  If you are grandparents with three married children who each have three children your tight little family of 14 together will owe $1.4 million.  That is $560,000 more than you all owe today, which is $840,000.

It is easily achievable with inflation.  The increase is 66.7% but divided by 10 is only 6.7% a year uncompounded.  Let us say real growth is 3% per year during that time so inflation only needs to be 4.7%.  We can do it.
Magic lives.

Besides.  The $560,000 increase in your family debt is split between 14 people so it is only $40,000 per person and only $4,000 more each year for each family member.  Doesn’t sound that bad, really.

And face it, $560,000 is just a nice house today.  Or two median priced houses.  Not so bad sounding now is it?  And these house prices I quote are in today’s prices.  Houses have been going up in price, what, 6% per year.  Compounded in ten years your $560,000 house will be worth $1,000,000 which is $440,000 more which offsets a big chunk of the increase in debt your family will owe.  Really, this is great Magic.  Of course you won’t own that house but someone else will.  It is collective Magic.  You and yours will get yours some way or another and it just might be in a couple of houses too.

The magic wand of declining interest rates is broken, but we have the magic of inflation. Believe in Magic.  We all depend on it.

And we know we will never have to pay off the debt.  Magic just doesn’t work that way.

1 comment:

  1. So we want inflation but wait until I have a chance to increase my debut at these low rates historically. Debut is blind to inflation the saying goes.