Measuring U.S. Fiscal Capacity using Discounted Cash Flow Analysis



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We use discounted cash flow analysis to measure a country’s fiscal capacity. Crucially, the discount rate applied to projected cash flows includes a GDP risk premium. We apply our valuation method to the CBO’s projections for the U.S. federal government’s deficit between 2022 and 2051 and debt in 2051. In spite of low rates, our current measure of U.S. fiscal capacity is lower than the debt/GDP ratio. Because of the backloading of projected surpluses, the duration of the surplus claim far exceeds the duration of the outstanding Treasury portfolio. This duration mismatch exposes the government to the risk of rising rates, which would trigger the need for higher tax revenue or lower spending. Reducing this risk by front-loading the surpluses also requires major fiscal adjustment.

Author(s): Zhengyang Jiang, Hanno Lustig, Stijn Van Nieuwerburgh & Mindy Z. Xiaolan

Publication Date: April 2022

Publication Site: NBER

DOI 10.3386/w29902


Life and Annuity Issuers Watch for Interest Rate Hike Sunshine



Executives are hoping that Fed interest rate increases could increase the yields on insurers’ huge investment portfolios.

Higher rates could be a good thing for Prudential, the company’s vice chairman told analysts.

MetLife’s CEO said higher short-term rates could mean a flatter yield curve that would be less favorable to life insurers.

Author(s): Allison Bell

Publication Date: 4 Feb 2022

Publication Site: Think Advisor

The Fed Delivers a Baby, Gold Jumps




The Fed Delivers a Baby

Actually, it was obvious 7 months ago that it was time to move away from “emergency” conditions.

The Fed decided to deliver a baby instead. 

In two more months, the Fed will finally finish tapering. Then we see what kind of baby steps the Fed makes. 

Author(s): Mike Shedlock

Publication Date: 11 Jan 2022

Publication Site: Mish Talk

Inflation Surge Whips Up Market Froth



Last week, real yields, which take into account the corrosive effects of inflation, hit some of their lowest levels on record. One measure of real yields, 10-year Treasury inflation-protected securities, fell to minus 1.2%, according to Tradeweb. That is the lowest on record, according to data going back to February 2003.

In essence, with real yields negative, the purchasing power of money invested will decline over the lifetime of those bonds.

Real yields have fallen because of colliding factors. These include the highest inflation rate in over three decades combined with nominal bond yields that have risen only modestly as central banks hold back from raising rates.

The prospect of negative returns on super safe inflation-protected bonds has pushed investors to buy riskier assets.

Author(s): Anna Hirtenstein

Publication Date: 14 Nov 2021

Publication Site: Wall Street Journal