Qwafafew talk 31 jan2013

Win Analytics LLC

The National Debt: Myths and Realities

A Presentation to the Denver Chapter of

QWAFAFEW

by Winthrop T. Smith

January 31, 2013

Win Smith and Win Analytics LLC

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• Win Smith – President and Founder of Win Analytics LLC

– 30+ Years in Investment Banking and Finance

– Oxford MSc in Mathematical Finance

• Win Analytics LLC – Financial Consulting Firm

– Research

– Transaction Structuring

– Financial Modelling

– Expert Witness

• Websites – www.winanalytics.com

– Blog: welltemperedspreadsheet.wordpress.com

http://www.winanalytics.com/




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Background: The National Debt

The National Debt Clock April 2008

3

Jesper Rautell Balle

Federal Outlays Combined On-Budget and Off-Budget

1990-2011 (Actual), 2012-2017 (Est.)

4

$0

$1

$2

$3

$4

$5

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

$Trillions

Fiscal Year

Net interest National defense Medicare Social Security Other

Data Source: White House

Estimated

Federal Receipts vs Outlays Combined On-Budget and Off-Budget

1990-2011 (Actual), 2012-2017 (Est.)

5

$0

$1

$2

$3

$4

$5

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

$Trillions

Fiscal Year Data Source: White House

Outlays

Receipts

Deficits

Surpluses

Estimated

Federal Debt Combined On-Budget and Off-Budget

1990-2011 (Actual), 2012-2017 (Est.)

6

$0

$5

$10

$15

$20

$25

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

$Trillions

Fiscal Year

Held by Public Held by Gov't Accts Held by Federal Reserve

Data Source: White House

Estimated

U.S. Treasury Marketable Debt Outstanding Debt by Maturity Year

As of May 31, 2012

7

$0

$500

$1,000

$1,500

$2,000

$2,500

2012 '14 '16 '18 '20 '22 '24 '26 '28 '30 '32 '36 '38 '40 '42

$Billions

Maturity (Calendar Year)

Bills Notes Bonds TIPS

Data Source: U.S. Treasury

U.S. Treasury Marketable Debt Outstanding Securities by Issue Date and Maturity Date

as of May 31, 2012

8

6/1/80

6/1/84

6/1/88

6/1/92

6/1/96

6/1/00

6/1/04

6/1/08

6/1/12

6/1/12 6/1/16 6/1/20 6/1/24 6/1/28 6/1/32 6/1/36 6/1/40

Issue Date

Maturity Date



U.S. Treasury Marketable Debt Outstanding Bills and Notes by Issue Date and Maturity Date

as of May 31, 2012

9

6/1/00

6/1/04

6/1/08

6/1/12

6/1/12 6/1/16 6/1/20 6/1/24

Issue Date

Maturity Date

Bills Notes


U.S. Treasury Marketable Debt Outstanding Bills by Issue Date and Maturity Date

as of May 31, 2012

10

6/1/11

8/31/11

11/30/11

2/29/12

5/30/12

6/1/12 8/31/12 11/30/12 3/1/13 5/31/13

Issue Date

Maturity Date

Bills


U.S. Treasury Marketable Debt Outstanding Securities by Interest Rate and Maturity Date

as of May 31, 2012

11

0%

2%

4%

6%

8%

10%

12%

6/1/12 6/1/16 6/1/20 6/1/24 6/1/28 6/1/32 6/1/36 6/1/40

Interest Rate

Maturity Date



Historic Interest Rates 3-Month and 30-Year Treasury Yields

1975 - 2012

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Recent and Historic Yield Curves

13

0%

1%

2%

3%

4%

5%

6%

7%

8%

3 mo 6 mo 1 yr 2 yr 3 yr 5 yr 7 yr 10 yr 20 yr 30 yr

Maturity


5/31/2012

10 Years Ago

20 Years Ago

5 Years Ago

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Myth #1: The Treasury is “Going Long”

Nate Silver on January 16, 2013

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• “Another surprise is how little we are paying in interest on the federal debt, even though the debt is growing larger and larger…. How is this possible? The reason is that although the government is borrowing a lot of money, it is doing so very cheaply because interest rates are low.… Borrowing costs aren’t expected to remain this low forever….Fortunately, much of the debt we have issued has relatively long maturities, meaning that we have locked in low rates.” [emphasis added]

From the U.S. Treasury website in June 2012:

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Average Maturity of Outstanding Debt and New Issuance Fiscal Years 2009-2012

17

4.39

4.88

5.21 5.39

2.87

3.69

4.03 3.94

24

36

48

60

72

2

3

4

5

6

FY 2009 FY 2010 FY 2011 FY 2012

Years

Fiscal Year

All Marketable Debt Outstanding

New Debt Issuance

Months


Marketable U.S. Treasury Securities Securities Issued in FY 2012, as of 9/30/12

18

$0T

$1T

$2T

$3T

0-1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

Principal Issued

Years to Maturity

FY 2012 (3.94 year Avg Maturity)


Marketable U.S. Treasury Securities Outstanding at 2011 Fiscal Year End (9/30/2011)

19

$0T

$1T

$2T

$3TPrincipal

Maturity (Fiscal Year)

0-1 Years to Maturity1-30 Years to Maturity

Average Maturity Principal (date) (years) 0-1 Years to Maturity $2.67T Feb-2012 0.39 1-30 Years to Maturity 6.94T Oct-2018 7.06 Combined $9.62T Dec-2016 5.21


Marketable U.S. Treasury Securities Outstanding at 2012 Fiscal Year End (9/30/2012)

20

$0T

$1T

$2T

$3T

Principal

Maturity (Fiscal Year)

FY 2012 IssuesOlder Issues

Average Maturity Principal (date) (years) FY 2012 Issues $3.67T Sep-2015 3.94 Older Issues/Original 6.94T Oct-2018 6.06 Older Issues/Adjustments 0.08T Jan-2026 13.34 Combined $10.69T Feb-2017 5.39


Explaining Changes in Weighted Average Life

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Group FY 2011 FY 2012 Change

FY13-41, Issued by FY11 7.06 6.06 -1.00

FY12, Issued by FY11 -1.85 1.85

FY12 New Issues -0.73 -0.73

FY12 Adjustments 0.06 0.06

Totals 5.21 5.39 0.18

U.S. Treasury Marketable Securities All Outstanding Securities as of September 30, 2012

22

$0

$25

$50

$75

$100

$125

9/30/12 9/30/16 9/30/20 9/30/24 9/30/28 9/30/32 9/30/36 9/30/40

Principal ($Billions)

Maturity

65 Month Weighted Average

36 Month Median

Maturity


U.S. Treasury Marketable Securities Securities Issued in Fiscal Year 2012

as of September 30, 2012

23

$0

$25

$50

$75

$100

$125

9/30/12 9/30/16 9/30/20 9/30/24 9/30/28 9/30/32 9/30/36 9/30/40

Principal ($Billions)

Maturity

47 Month Weighted Average

19 Month Median

Maturity


Two Ways to Measure the Length of Treasury Debt All Marketable Debt and New Issuance

Fiscal Years 2009-2012

24

0

12

24

36

48

60

72

0

1

2

3

4

5

6

FY 2009 FY 2010 FY 2011 FY 2012

Years

WAM: All Debt

WAM: New Debt Weighted Average Maturity

Median: All Debt Median: New Debt

Median Maturity

Month


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Myth #2: The Debt Doesn’t Matter

The Debt Doesn’t Matter Because:

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A. We Can Always Refinance

B. We Managed Similar Debt After WWII

C. Low Rates Mean Investors Aren’t Worried

D. We Owe it to Ourselves

We Can Always Refinance, Part I

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Pop Quiz:

Suppose we always refinance and never repay the principal. If we pay interest forever, what is the present value of $11 trillion in marketable debt? Assume the interest rate on each security is the appropriate discount rate.

We Can Always Refinance, Part II

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Fiscal Year 2012 Debt Summary

Gross Issuance $7.6 trillion

Maturing Debt $6.5 trillion

Net Issuance $1.1 trillion

We needed more than $7 trillion in funding last year, almost 7x the new borrowing for the deficit.

We Managed Similar Debt After World War II

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Debt Structure: 2012 vs 1946

30

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

<1y 1-5 5-10 >10

% o

f To

tal M

atu

riti

es

1946

2012

Post

Today

Chart Provided by: Center for Financial Stability, Inc.

Low Rates Mean Investors Aren’t Worried

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• There is high demand for “safe” assets

• Rates have fallen around the world

• Expectations for growth and inflation are low

But What About the Fed?

What is the Fed Doing?

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• Quantitative Easing and Operation Twist

• Reduce Duration Held by Private Investors: By reducing the supply of duration in the market, this action should put downward pressure on longer-term interest rates relative to levels that would otherwise prevail.

• Fed measures impact in terms of “10-Year Equivalents”

The Fed’s Impact on the Treasury Market in “Ten-Year Equivalents”

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Chart Source: Stone & McCarthy Research Associates

Marketable U.S. Treasury Securities Annual Changes in Principal

Fed Holdings Compared to All Outstanding

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-$200

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

FY 2010 FY 2011 FY 2012

$Billions

Fed Holdings Outstanding

Data Sources: U.S. Treasury, Federal Reserve

Marketable U.S. Treasury Securities Annual Changes in Ten-Year Equivalents

Fed Holdings Compared to All Outstanding

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-$200

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

FY 2010 FY 2011 FY 2012

$Billions

Fed Holdings Outstanding

Data Sources: U.S. Treasury, Federal Reserve

We Owe it to Ourselves

Ownership of Marketable Debt December 2011

36

Federal

Reserve

16%

U.S.

Private

36% Foreign

Private

13%

Foreign

Central Banks

35%


Qwafafew talk 31 jan2013

Economy & Finance

Transcript of Qwafafew talk 31 jan2013