A lot of people have been making political hay with the mantra, “Doomsday is just around the corner” and “The USA is already bankrupt.” No doubt some of them are making money on it, too, with books, seminars, speaking engagements, op-eds, and other methods.
The reason I’ve been challenging the doom peddlers frequently at this blog is because I think doomsday is, and will remain, a near-zero-probability straw man—as long as we can avoid implementing growth-unfriendly policies (...in other words, as long as we can keep our 535 Capitol Hill politicians from shooting our country’s foot off with a debt-phobia shotgun). And yes, my analysis does include the baby boomer retirement surge, and yes, it does include spending whatever it takes to defend ourselves properly with robust (and continually-evolving) intelligence, diplomacy, and military capabilities.
But what if I’m wrong about financial doomsday? It’s a slim chance, but I’ll be the first to admit that “near-zero” probability isn’t quite the same as “zero.” So, to cover all the bases, wouldn’t it be wise for me to keep an eye on the key indicators that would jump out of whack if financial doomsday appeared on the horizon? Yes, it would. That’s why I set up the new Doomsday Dashboard at the bottom of this article.
To whom should I listen?
The doom peddlers, such as our country’s Comptroller General, have inside-track access to the big microphones and the newspaper headline-writers. But they are overwhelmingly outnumbered by the buyers and sellers in the financial markets. And in my studied opinion, the millions of people who buy and sell bonds and currency every day, worldwide, would start signaling us if they spotted USA Financial Doomsday on the horizon. [I have great difficulty believing that a small group of agenda-driven doom peddlers is smarter than the collective millions of buyers and sellers placing their own money on the line every day—so I’ve chosen to track what the markets are saying. Could it be that the market participants are stupidly ignoring the doom peddlers? Maybe, but I think it's far more likely that the market participants are listening, then having a good chuckle, then blowing them off. Sorry, doom peddlers, but I choose to track the market signals instead of your fund-raising speeches.]
The Definition of "Doomsday"
If the markets will signal us when danger appears on the horizon, which signals should we be watching? First I need to define the key term: “Doomsday” is upon us when we get stuck in one of two conditions: a currency-destroying hyperinflation, or a death-spiral deflationary depression. In a hyperinflation, everybody loses faith in the currency, and few want to lend money or hold onto it; in a deflationary depression, everybody loses faith in the economy, and few are willing to borrow money, or willing to spend it, or able to earn it. Both of those conditions have led to the overthrow of governments—and I don’t want that to happen here, so I want to watch for signals that tell me whether our economy is inching towards one or the other.
If we succeed in navigating safely between those two black holes—by maintaining a healthy, growing economy with low, predictable inflation and interest rates—our grandchildren are in for a bright, safe, prosperous future.
The Indicators
As a result, I’ve chosen three indicators for the new Doomsday Dashboard:
• Inflation Rate, as measured by the Personal Consumption Expenditures index;
• Long Term Interest Rate, as measured by the 10-year constant maturity Treasury Note;
• Debt %GDP, as measured by total nominal federal debt divided by nominal GDP.
The first two are substantive outcomes that really do affect the quality of our daily lives. Unlike the first two, however, the third one is not really a financial outcome; it is (in theory, but not necessarily in practice) something that might lead to undesirable interest rates or inflation. I included it on the Dashboard so that, over time, we could see the correlation (if there is any) between a rising or falling debt ratio and rising or falling interest rates or inflation rates; historical evidence says there is no relationship, but it bears watching because the doom peddlers are always talking as if there is. Again, though, it’s interest rates and inflation (or deflation) rates that hurt us or help us, not debt per se.
[Note: I could have shown the dollar’s value against a foreign currency basket instead of the debt-to-GDP ratio, but the dollar’s value change is usually reflected quickly in the inflation rate and nominal interest rate, and I needed to keep this graphic down to a size that would fit most screens. I’ll adjust the design later if that turns out to have been a bad decision.]
Here’s the Doomsday Dashboard. The thick black arrow on each of the three dials below shows where we are today. I’ve also added red and blue arrows to show the high and low readings (as far back as the data goes). I’ll update this monthly, but be advised that it might get boring after a few months.
Sources:
Inflation is calculated from the indexes of Personal Consumption Expenditures.
Long Term Interest Rate is from the 10-yr constant maturity Treasury Note.
Debt %GDP is from the Treasury, the Commerce Dept.
This book (
None of the experts shared Reagan’s vision of a world free of nuclear weapons, and some of them believed it was a dangerous vision ... U.S policy [to the Soviets] was grounded in nuclear deterrence. This traditional view, as expressed by [Alexander] Haig, is that nuclear weaponry is “the greatest guarantor of peace and stability.” Reagan, in contrast, thought that nuclear weapons were inherently evil and should be abolished.
Debt that is incurred for capital projects of benefit to citizens and their productivity, or debt that is incurred to avoid inflicting destructive taxes on growing firms, can become vital assets for growth and progress.
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