America's Financial Future

[bobman0330]

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Interest rates MUST have been some part of this calculation, however, and the time frame he happened to choose made the effect of interest rates on the present value of our debt obligation about as large as it could have been.

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We don't know what interest rates he used though. I think it's reasonable to assume where talking about long term U.S. treasury rates like those on the 10 yr. Fed monetary policy does impact these rates significantly and thus the PV is calculated based on those numbers are probably not out of line IMO.

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He actually does mention that he's using Treasury rates, if I understood him right.

[The once and future king]

Why dosnt he mention the TCO of a squadron of stealth bombers or a carrier attack group.

Its like gargantuan defense spending is some untouchable golden calf whilst if the yanks spend to much on socialized medicine OMFG end of the world.

[Bremen]

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Why dosnt he mention the TCO of a squadron of stealth bombers or a carrier attack group.

Its like gargantuan defense spending is some untouchable golden calf whilst if the yanks spend to much on socialized medicine OMFG end of the world.



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Because defense spending can be scaled back quite easily if funds fall short.

[T50_Omaha8]

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if IRs went down over a 5-year period, it always makes the 5-year increase in PV of a future obligation artificially large.

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Artifically? Are you suggesting that there is a better discount rate on hand than the market rate?

[/ QUOTE ]No, I'm saying the INCREASE in PV of ANY financial transation looks really big when rates decrease. Most people hear such an argument and think nothing more than, "wow, our financial obligations DOUBLED!" even though the main cause of this was simply interest rates changing. If interest rates went back up the PV of this obligation would decrease dramatically again.

It's taking an absurd amount of convincing for something so basic to catch on. Quick question...have you ever taken a finance course, or at least calculated the PV of a future obligtion? You don't seem to understand that the main cause of the increase he showed is simply a fluctuation in interest rates. I don't understand why it's so hard for such a basic finance concept to sink in.

[ShakeZula06]

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Its like gargantuan defense spending is some untouchable golden calf

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They don't call it the Warfare-welfare state for nothing.

[The once and future king]

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Why dosnt he mention the TCO of a squadron of stealth bombers or a carrier attack group.

Its like gargantuan defense spending is some untouchable golden calf whilst if the yanks spend to much on socialized medicine OMFG end of the world.



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Because defense spending can be scaled back quite easily if funds fall short.

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Well then, problem solved. In 2004 Bush asked for 400 billion for Defense, which was an increase of 20% on the previous year. By 2007 this had reached 537 billion and this is NOT including the wars in Iraq or Afghanistan (+100 billion) nuclear weapons research or even the production or maintenance of weapons.

America spends more on defence than the next thirteen biggest spenders combined.

[mosdef]

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No, I'm saying the INCREASE in PV of ANY financial transation looks really big when rates decrease.

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If you're discounting at the correct rate, then the market price does really change which is as real as it gets.

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Most people hear such an argument and think nothing more than, "wow, our financial obligations DOUBLED!" even though the main cause of this was simply interest rates changing.

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You hold a 15 year bond with a PV of $10,000. Interest rates go up 100 basis points. You PV goes down to $9,000. If you try to sell it to someone will they give you $10,000? If not, which price is artificial and which is not?

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It's taking an absurd amount of convincing for something so basic to catch on. Quick question...have you ever taken a finance course, or at least calculated the PV of a future obligtion?

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Only for about 7 hours a day. It's my job.

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You don't seem to understand that the main cause of the increase he showed is simply a fluctuation in interest rates.

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I didn't defend his methogology, I'm just saying that picking a different discount rate would may be even more artificial. You can't just make up discount rates to value future obligations. Well, you can but you'll find that everyone else in the market values things differently from you.

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I don't understand why it's so hard for such a basic finance concept to sink in.

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A change in PV due to a change in interest rates is real. If you try to sell the payment stream using old interest rates buyers won't pay that price. There's nothing more real than that.

[Felix_Nietzsche]

The perfect opportunity to kill social security, medicare, and other entitlement programs.....I welcome this.

We will welch on the "obligations" that nitwit politicians made. Let the parasites go after the pols that made this false promises. I won't be getting my SS but it will be worth it.... It is interesting that Bush tried to save SS by letting people invest in the stock market but Dems were too stupid to take the life preserver thrown to their precious prgram... RIP Social Security.....and rot in hell.

[T50_Omaha8]

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A change in PV due to a change in interest rates is real. If you try to sell the payment stream using old interest rates buyers won't pay that price. There's nothing more real than that.

[/ QUOTE ] Right. But we're not actually trying to invest money at any interest rate. He shows the following figure:

Fiscal Exposures
2000: $20tn
2005: $46tn

The main cause of the increase in this figure is the decrease in interest rates. But he wants the viewer to extrapolate this trend and conclude that fiscal obligations will continue to spiral out of control at this pace, even though that is completely unlikely (as it would require interest rates to continue to decrease from below their 2005 level).

He chose the first year, 2000, so interest rates were very high, causing the first value to be as low as possible, and the second year, 2005, so interest rates were very low, causing the second value to be as large as possible. This makes the increase over the time period especially pronounced, driving home his point that healthcare and social security costs are spiraling out of control. When he says, "from 20.4 trillion to 46.1 trillion in FIVE YEARS," he clearly doesn't want us to consider that interest rates are the main cause of this increase. Hell, if you had told any economist that a) the PV of fiscal exposures over the next 75 years in 2000 is $20tn and b) interest rates decreased between 2000 and 2005, he would easily say, "ah, then the PV of fical obligations must have gone up!" The fact that the PV went up that much isn't substantial. It's trivial.

His tactics are a great way to win people over, but they're also very misleading.

[mosdef]

Okay, so what you really object to is his communication of the results, not the discount rate used. I still object strongly to your language from your earlier post, where you said the interest rate movements "artificially" moved the obligation. I don't think there's anything artificial about it, but I agree that putting two numbers side by side without reconciling from one to the other is extremely misleading.