Socionomic and Antifragile potpourri

Able to post regularly again, for how long who knows.

Highly recommend Nassim Taleb's Antifragility. I wouldn't describe it as a self-help book, but many of the ideas in the book can be applied to daily life, as well as to business and government and everything in between.

Below is a 1 hour interview with Taleb that is chock full of ideas.

One of the ideas in Antifragility is signal to noise. He uses the example of news, most of it is noise. He says that many days, news should be a couple of lines, and other days it should be pages and pages. In order to fill up time and space, however, news is filled with lots of noise. He gives the example of 1-to-1 signal to noise in one year. That is, you check the major news for the year and half is signal, half is noise. Well, on a daily basis, the signal to noise ratio will be something like 1 to 99.

Back in 2010, I often wrote about the political problems in the EU and the likelihood of a breakup. I have tried to cover major developments such as extreme parties in Greece, Scottish and Catalonian secession movements, but otherwise I view these stories as confirming the signal. Unless something changes, I don't feel the need to cover every blip along the trend. Occasionally, I write about it to remind myself or for new readers, but otherwise I'm not interested until the trend changes. EU breakup is still on.

Similarly, I covered Egypt's problems last year. Literally one year ago, I posted: Egypt heading for collapse. I see news such as this: Egypt's protests reveal deficit of trust in Muslim Brotherhood as confirming the socionomic theory and the signal. It wasn't noise. If I'm wrong or something changes, it is worth writing about, otherwise Egypt is still headed for collapse.

Now there is ethnic cleansing in Los Angeles. This is an early stage movement and has major, major implications for American politics because it ties into the secession movement. There could very well be a Mexican secession movement in the Southwest before the South ever gets around to declaring independence. In any event, it is a marker for what is possible as social mood declines, with serious interracial violence in the cards in places such as LA.

Finally, China is enjoying a small bounce in social mood evidences by the stock market rally, but mood remains generally negative. In What Causes Revolutions?, Patrick Chovanec writes:
A surprising number of people in China have been writing and talking about “revolution”. First came word, in November, that China’s new leaders have been advising their colleagues to read Alexis de Tocqueville’s classic book on the French Revolution, L’Ancien Régime et la Révolution (The Old Regime and the Revolution), which subsequently has shot to the top of China’s best seller lists. Just this past week, Chinese scholar Zhao Dinxing, a sociology professor at the University of Chicago, felt the need to publish an article (in Chinese) laying out the reasons China won’t have a revolution (you can read an English summary here). Minxin Pei, on the other hand, thinks it will.
He goes on to quote Richard Pipes:
So, around 1900, we have a mechanically rather than organically structured state that denies the population any voice in government, and yet, at the same time, aspires to the status of a global power. This aspiration compels it to promote industrial development and higher education, which has the inevitable effect of shifting much opinion and the power to make decisions to private citizens. Pre-1905 tsarism thus suffered from an irreconcilable contradiction. A not-insignificant segment of the population received secondary and higher education, acquiring, in the process, Western attitudes, and yet it was treated as being on the same level with the illiterate peasantry, that is, unfit to participate in the affairs of state. Capitalist industrialists and bankers made major decisions affecting the country’s economy and employment, yet had no say in that country’s politics because politics was the monopoly of the bureaucracy …

The result was a situation which Marx had rightly predicted had to arise when the political form — in this case, heavily centralized and static — no longer corresponded to the socio-economic context — increasingly dispersed and dynamic. Such a situation is by its very nature fraught with explosive potential. In 1982 [Pipes writes], when I worked in the National Security Council, I was asked to contribute ideas to a major speech that President Reagan was scheduled to deliver in London. My contribution consisted of a reference to Marx’s dictum that, when there develops a significant disparity between the political form and the socio-economic context, the prospect is revolution. This disparity, however, had now developed in the Soviet Union, not in the capitalist West. President Reagan inserted this thought into his speech, and the reaction in Moscow was one of uncontrolled fury: this, of course, was a language they well understood and interpreted to mean a declaration of political war against the Communist Bloc. Their anger was enhanced by the awareness that the statement was correct, that they were ruling in a manner that did not correspond to either the economic or the cultural level of their population.

Ethnic cleansing in Los Angeles

Multiculturalism + negative social mood = conflict.

Reports of ethnic cleansing in Los Angeles has been under reported, but it will continue to grow even as the media sheds light on the subject.

Attack on family in Compton latest incident in wave of anti-black violence
When a friend came to visit, four men in a black SUV pulled up and called him a "nigger," saying black people were barred from the neighborhood, according to Los Angeles County sheriff's deputies. They jumped out, drew a gun on him and beat him with metal pipes.

It was just the beginning of what detectives said was a campaign by a Latino street gang to force an African American family to leave.

The attacks on the family are the latest in a series of violent incidents in which Latino gangs targeted blacks in parts of greater Los Angeles over the last decade.

Compton, with a population of about 97,000, was predominantly black for many years. It is now 65% Latino and 33% black, according to the 2010 U.S. census. But it's not only historically black areas that have been targeted.

Federal authorities have alleged in several indictments in the last decade that the Mexican Mafia prison gang has ordered street gangs under its control to attack African Americans. Leaders of the Azusa 13 gang were sentenced to lengthy prison terms earlier this month for leading a policy of attacking African American residents and expelling them from the town.
This is a major trend underway that will only grow with an amnesty for illegal immigrants that could add 10-20 million more Americans, many of whom are Latino.

Immigrants are more likely to be racist against other nationalities. A rise in anti-semitism in Europe and the United States, for example, is being mainly driven by immigration.

Most multicultural societies are held together by a dominant majority, but when that majority slips from power, as we see in California which is now less than 50% white, chaos ensues.

Many people may dismiss the incident as a localized or one off event, they may consider the charge of ethnic cleansing excessive. However, based on social mood, demographics and the government's financial position, it is a very reasonable assume escalating conflict (both in number and in the level of violence) alongside a weakening government less and less able to stop the violence. The next time there are "riots" in LA, it might actually be organized urban warfare.


How did low budget Lost in Thailand become China's alltime box office champion?

Socionomics has the answer......the studio happened to open the film at the start of a major bull run in the stock market, perfectly timing the launch of this comedy. I have a chart pasted on my Chinese blog.


Behind the Great Firewall; Global Warming Hoax Collapsing

Note: I'm behind the Great Firewall and posting will be sporadic until at least the end of the month. I will try to post some at the Chinese blog.

I've previously written posts such as Global warming conspiracy collapsing and Declining social mood dooms the authoritarian climate change agenda. Now we see even more evidence of the failure, this time from the NYTimes.

New York Times Dismantles Its Environment Desk
The New York Times will close its environment desk in the next few weeks and assign its seven reporters and two editors to other departments. The positions of environment editor and deputy environment editor are being eliminated. No decision has been made about the fate of the Green Blog, which is edited from the environment desk.

Here's the Google Trends for global warming. Unfortunately, many terms such as global cooling associate with global warming because people talk about them together when climate issues arise, such as skeptics referencing the global cooling fears of the 1970s. I tried as neutral a term as possible to get at the conter-trend taking place and I came up with solar output. The astrophysicists were generally more skeptical of global warming because they placed a greater role on the Sun. It appears they are right. As discussion of solar output grows (and the weak solar output associated with cooling), the global warming hoax collapses.


Social mood and mistakes

Declining social mood correlates with greater numbers of accidents and mistakes. It also changes the way accidents and mistakes are interpreted by the market.

Here we have a perfect example: It's A Brain? It's A Kidney? It's KFC's Next PR Nightmare
As if Yum Brands were not suffering enough this morning - as they forecast China comp sales to drop 6% (more than the forecast 4% decline), it seems the UK has their next PR disaster waiting to happen, courtesy of their KFC brand. After a 19-year-old Brit found a "horrible wrinkled foreign body" in his fried chicken meal, KFC has apologized (rather magnanimously) saying "while there was no health risk, we agree it was unsightly." Judge for yourself just how puke-worthy and generally emotionally scarred you would have been after biting into this 'brain-looking' image. KFC clarifies: "Although we haven't received the product, it appears from a photograph that unfortunately on this occasion a kidney, and not a brain as claimed, was not removed in the preparation process."
Chinese sales fell due to news reports that KFC chickens in China were grown rapidly with supplements.

During positive social mood, the firm would take a hit, but this news would engender more comedy than fear about the food supply.


Socionomics in fashion; pound headed for collapse?

What a plank! Bizarre start to men's fashion week in London

hide one's face in shame

Sterling crisis looms as UK current account deficit balloons
It’s the sort of problem you might have thought disappeared with the 1970s, but as the Coalition renews its wedding vows, that’s the unsettling possibility raised by economists at both HSBC and Royal Bank of Scotland. With fears of a eurozone break-up, a calamitous fiscal contraction in the US, and a hard landing in China now fast receding, it is possible financial markets will refocus their attentions on more conventional concerns. The failings of the UK economy might be prime among them.

Social mood in China: significant protest grows

The change in leadership is leading to greater pushes for political freedom. Journalists in the southern city of Guangzhou (Canton) started protesting over the government's requirement that they run a pro-Communist Party editorial.

China media stand-off with censors escalates
The press freedom protests followed the censorship of a pro-reform editorial last week. Authorities subsequently attempted to silence the newspaper after its journalists objected. On Sunday, the paper’s official microblog carried a message saying that the text had been written by a staff member at the paper. But senior editors denounced that as a lie and said censors had forced management to take control of the microblog.

The incident marks the first case of open revolt against press censorship since January 2006, when magazine Bing Dian, or Freezing Point, was closed. “News media controls are gradually shifting from censorship after publication to prepublication censorship,” said Li Datong, the former editor of Freezing Point. “This is not an accident, it’s becoming routine, and the Southern Weekend colleagues can no longer bear it.”

Censorship Protest Gains Support in China
A number of media organizations have rallied behind journalists at Southern Weekly by posting veiled messages of support on social media and their own websites. Sina Corp.'s Tianjin news portal, for example, arranged its front page so that the first character in each headline spelled out an acrostic message: "Go Southern Weekly."

Chinese writer and race-car driver Han Han described in his popular blog Monday how Chinese writers live in constant uncertainty over what they can and can't say.

"Even if you want to talk about the regulations, they won't clearly tell you what they are, so every person more or less is in violation of the 'regulations,' " he wrote. He lamented what he described as the anonymity of an invisible Chinese censor. "He covers your mouth and tells everyone you're cheerful," the post read.
Chinese of all walks of life are posting photos supporting the newspaper. Below are just a couple of photos that have come across my Weibo feed. The message in the photos is one of support for the paper.

It appear to be a more significant protest, though as usual the Western media distorts and exaggerates. To me the big story is that ordinary Chinese are publicly joining in.

In case you missed it, the golden dowries of Fujian

I didn't blog about this because I thought it'd get more coverage around the web, but I haven't seen many reports, so here it is: Fujian billionaire marries off daughter with gold-laden dowry
Wu Duanbiao, chairman of ceramics firm Fujian Wanli Group, bestowed more than a billion yuan (HK$1.2 billion) as dowry for his daughter’s marriage on Sunday, according to media reports.

The wedding took place in Cizao town, Jinjiang county, in eastern China's Fujian province.

Pictures of the wedding were posted on the internet on Sunday, showing a dowry that included four boxes of gold jewellery, a bankbook with deposits worth 20 million yuan and Wanli stock worth 5 million yuan.

There was a previous huge dowry at the beginning of December in the same city, but only 200 million yuan. 福建老板嫁女陪嫁妆2亿元

Where are the silver shorts?

Richard Russell - The 60-Year Shocker, Silver Shorts & Gold
Now this may be “far out.” I'm reading a lot about silver and its huge short position. I hear that the silver shorts are bigger than the amount of physical silver that is readily available. The silver mining stocks have already surged. And I wonder if silver starts to boom, whether that action wouldn't rub off on gold? Hmmm, it's a thought.”

I'm not an expert on the silver market and I've also heard of the physical short position. But it's clear from the COTS report that specualtors have already used the paper market to take long positions in the metal.

China starts political reform

China turns dark page of history, puts end to labour camps
In a clear reversal of a decades-old practice of human rights abuse, China announced on Monday that it would put a stop to the system of “re-education through labour”, more commonly known as labour camps, in 2013.

A senior Chinese legal official told the Post that Meng Jianzhu, head of the Communist Party’s Poltiical and Legal Affairs Committee, told a meeting of judicial and legal officials from all over the country on Monday that the Party had decided it would stop the practice of sending people to labour camps within the year.
Many local governments use labor camps to punish people who complain about having their land stolen. There was even a case where someone who complained about something in a tweet was sent to a labor camp. These abuses by tyrannical local officials will not end, but will be less severe.


Updated: ZeroHedge has a more pessimistic debt model

I still think my presentation has more value for predicting a debt crisis, but ZeroHedge offers up a model with different variables and arrives at roughly the same conclusion. ZeroHedge's model is more pessimistic than mine, which is why I believe mine is valuable, as I'll explain below.

ZeroHedge's even worse forecast for the debt can be seen in "The Magic Of Compounding" - The Impact Of 1% Change In Rates On Total 2022 US Debt
Our assumptions are also painfully simple:

i) grow 2012 year end GDP of ~$16 trillion at what is now widely accepted as the 'New Normal' 1.5% growth rate (this can be easily adjusted in the model);

ii) assume the primary deficit is a conservative and generous 6% of GDP because America will never, repeat never, address the true cause of soaring deficits: i.e., spending, which will only grow up in direct proportion with demographics but as we said, we are being generous (also adjustable), and

iii) sensitize for 3 interest rate scenarios: 2% blended cash interest; 3% blended cash interest and 5% blended cash interest.
I assumed a 3% rate of increase in the debt along with GDP. ZeroHedge uses the exact same interest rate break up as mine (+1% and a jump to 5%), except they start with 2% instead of the current 2.6%.

Below is my chart that is based on interest costs as a percentage of government revenues. My chart is even more painfully simple; it extends government revenue growth, spending and therefore debt at 3% into the future. Then what I do is apply a static interest rate. In my scenario, you can see what happens to changes in interest rates based on this scenario—at any point in time. In other words, my chart is best read as a sudden "Return of the Bond Vigilantes" scenario, because there is no compounding in my model. The total debt is the same no matter the three interest interest rates.

ZeroHedge calculates debt/GDP ratios and also total debt. Here's their debt-to-GDP chart:

In the chart below, I take ZeroHedge's GDP forecast and compare it to my debt growth model. As you can see, my model presents three forecasts that work off of the most positive debt scenarios from ZeroHedge.

Even in the most optimistic scenarios, a rise in interest rates to 3.5% blows the budget up and a rise to 5% would cause a sovereign debt crisis. Things are far worse than most realize.

Below are my previous posts on this model.
America's debt problem
America's debt problem grows by $600 billion

UPDATE: Here are the debt assumptions behind my model, in graph form:

As you can see it is quite simplistic and yet arrives at the same conclusion: game over. The biggest flaw/point of contention in the model is the size of the deficit. Most forecast the deficit shrinking over time. My model has it staying around 8%, while ZeroHedge has it falling to 6% of GDP. I created my forecast after the fiscal cliff bill was passed. Unless the debt ceiling debate causes Congress to suddenly grow a spine, I believe it will prove relatively accurate with larger deficits from a recession and smaller ones during recovery.

If I slowly take deficits down to 3% of GDP in 2022 (about 0.5 percent per year), the total debt is running at about $25 trillion in 2022, $5 trillion below my forecast. That gives a debt to GDP of 138% (using ZeroHedge's forecast), at which point an interest rate of 4% would cost the government $1 trillion in interest payments. In my previous posts, I've said that these numbers could be met with stronger GDP growth or spending cuts, but both are optimistic today. Social Security is already in the red, forcing government to cut spending in order to hold the deficit level. Obamacare taxes really hit in 2014 with the penalties and that's when the economy will slow considerably, likely sinking into recession later in 2013. Medicaid costs will surge as people forego insurance, pay the penalty and sign up for Medicaid.

In the end, even if the model is pessimistic and growth comes through, there will need to be serious cuts to entitlements and defense now in order to avoid a crisis. The U.S. is on an unsustainable path and any negative shock could force it into crisis. My model implicitly assumes some type of bailout or extra-ordinary cost that is not part of most forecasts.

If everything goes right with no bailouts, no recession, the U.S. will come out at a point in the future where debts are in control. Debt to GDP would be very high, but if the annual deficit fell to 3% of GDP then considerable growth or spending cuts were made to make room for rising interest payments. The U.S. can't get there via tax rates because the slowing of the economy would create a recession and increase the odds of a crisis.

Optimists can say my model is pessimistic, but they need nothing bad to happen in the next ten years. I'm betting that socionomics is still working in favor of the pessimists.

Finally someone says it: default on the debt is a choice

I don't know that Ted Cruz is the only Senator who has stated the obvious, but it's a pathetic that I cannot think of another Senator who has said this loud enough for people to hear.

Let me be clear, I do not support default on the debt and we should never default on the debt and the only players who are threatening to default are President Obama and Harry Reid. This is an issue, and earlier in the show you played the President threatening default. In any given month tax revenue are 200 billion and interest is 30 or 40 billion. There is it plenty of revenue to service the debt and any responsible President would've stood at that podium and said 'whatever happens with the debt ceiling, we will always pay our debt. We'll never default on the debt' and the reason the President isn't doing that is he's trying to scare people and raise the spector of financial apocalypse." - Sen. Ted Cruz (R-TX) on Fox News Sunday 1/6/12

Social mood in one headline

Flu infections sweep America hospitalizing thousands and leaving 18 children dead of complications, and it's going to get worse

Periods of negative mood suffer more epidemics.


North Korea prepares for speedy opening of the economy

North Korea prepares for speedy opening of the economy
North Korea is planning an economic opening of the country to foreign investors. According to the FAZ, the communist country and with the advice of discreet German economists and lawyers. "There is a master plan," said a scientist involved in the deliberations of this newspaper. "They want the opening later this year."

Interest in the impoverished and isolated country shows especially in a modern investment legislation. For the opening, however, apparently does not copy the Chinese model primarily with special economic zones for foreign investors. "Rather, they are interested in the Vietnamese blueprint, where companies are specifically selected for investment," said the scientist, who teaches at a prestigious German university.
This is completely under the radar in the U.S., but the Chinese financial pages have had non-stop coverage of North Korea's opening. In fact, there are even North Korea concept stocks in China—companies that have some business or plan business in North Korea were a hot topic last autumn.

North Korea's opening will be a big story in 2013 and it also has major foreign policy implications. The future of America's role in East Asia will even come into question.

Interest rates will collapse if the debt ceiling isn't increased

Many financial pundits and politicians are speculating that interest rates will rise if the debt ceiling isn't increased. (Talk of default is utter nonsense, as the government collects enough revenue to pay interest costs 10 times over.) Instead, refusal to lift the debt ceiling will shut down almost all of the government. It will pull billions out of the economy and plunge it into recession. Resource prices will tumble and debt problems in China and Europe will explode. This crisis alone will force interest rates down. If Congress refused to raise the limit ever again, or only did so after enacting serious cuts, investors would recalculate future U.S. liabilities. The dollar would strengthen as well, as it did in 2008. The Federal Reserve would step in with quantitative easing, setting up the nation for higher inflation once this crisis passed. The U.S. would be on a sustainable fiscal path, such that inflation would eat away at the deficit and future liabilities. GDP would be lower, probably more than 10% lower, but the debt crisis would be over.

I don't expect any of this to happen, and the fact that most of the country, including the top decision makers, are this misinformed is a big reason why it will never happen. Otherwise, Obama would be out saying refusing to raise the debt ceiling will cause a depression, not a default, since politically either one works as a threat/warning.

America's debt problem grows by $600 billion

In America's debt problem, I made a simple calculation of the federal government's interest costs as a percentage of revenue. It assumed no feedback, positive or negative, to change the path of accumulating deficits. The model is simplistic, but the result has value because it shows that if the trends hold the debt costs are going to trigger a crisis. To use an imperfect analogy, it's like a patient with a compromised immune system. We don't know what will finally break the remaining immune response—an infection, a bad flu, a bad fall. Or maybe the doctors are successful and the patient outlives their expectations, but as the patient ages, their immune system continues to weaken. Unless the immune system recovers, the patient is constantly in danger of any small illness.

I am wholly open to the chance that forecasts are too pessimistic. As a follower of socionomics though, I believe the odds are against the U.S. solving the debt crisis. The fighting and hostility displayed in the fiscal cliff debate, and the intraparty fighting over the Sandy Relief bill, shows that compromise will be next to impossible. Where compromise is made will be in the path of least resistance—avoiding short-term pain and hard decisions.

In the conclusion of the previous post, I said that forces of austerity suffered a total defeat in the fiscal cliff debate. Not a few days later, we're already seeing the deficit estimates increased.

Friday Night Dump: CBO Admits Error, Now Expects Another $600 Billion In Deficits From Obama Tax Cuts
That dramatic widening of the budget deficit will increase interest payments on the federal debt, an impact that is not included in CBO’s cost estimates. The additional debt service will cost about $600 billion. Thus, if we added the estimated cost of the legislation and the related debt service to our previous baseline budget projections (which followed current law at the time), we would show additional deficits between 2013 and 2022 of roughly $4.6 trillion.
My static model of the deficit assumed the situation remains the same: revenues, expenditures and the deficit all grow at 3%. This $600 billion isn't included, meaning my model is less likely to be wrong.

Now, the CBO is no stranger to extending trends into the future, and ending up with wildly inaccurate forecasts in the process. This is one reason why one doesn't use static scoring in most cases, and why I don't consider my model a forecast as much as a acid test. If you run a simple model and find the trend is unsustainable, then negative feed back is going to blow the system up because events unfold in a non-linear fashion. Interest rates won't stop at 5% as forecast in my model, rather if interest rates climb that high, they will quickly jump to 7%, 10% and beyond. The baseline is unsustainable, let alone a deviation from it.

Positive data can change the situation completely, but the positive feedback is digging out of a hole. It only takes small errors to trigger a negative avalanche, while big positive changes are needed to create a virtuous cycle. I just don't see that large positive shock coming, as this $600 billion increase shows. From the CBO:
Although we expect that the legislation just enacted by the Congress will lead to higher output and income in 2013 we also expect that it will lead to lower output and income later in the decade than would have occurred under prior law. The legislation lowers tax rates for many people—thereby boosting output—but it also expands budget deficits—which will reduce national saving and lower the stock of productive capital, thereby reducing output relative to what would have occurred under prior law. CBO has not estimated the longer-term economic effects of the legislation itself, but we previously estimated the economic effects of the aforementioned alternative fiscal scenario, which embodied the assumption that many policies that were in effect or had recently been in effect would be continued. Under that scenario, as described on page 37 of our Update, we estimated that real gross national product (GNP) would be 1.7 percent lower in 2022 than would have been the case under prior law.
Deficits are now at the point where there is negative feedback on the economy. GDP growth will slow and spending cuts will slow it further in the short-term, while taxes slow it permanently. The government will continue avoiding the short-term pain of cuts until it is too late, when making cuts will slow the economy at precisely the wrong moment as investors worry the government cannot finance the existing debt. There is no room for error.

Bulls are back in the euro

Euro is very weak relative to the shift in sentiment, with specs now bullish. Once again poised for a very volatile move.


Where are China's forex reserves going?

Chinese Fly Cash West, by the Suitcase
Amid a rush of newly affluent Chinese eager to move money out of China, U.S. and Canadian border officials are seizing large amounts of cash tucked into wallets, purses and suitcases at airports across North America.

Officials at Canada's two busiest airports—Toronto and Vancouver—seized around 12.9 million Canadian dollars ($13 million) in undeclared cash from Chinese nationals from April 2011 through early June 2012, according to documents provided to The Wall Street Journal by the Canada Border Services Agency.


More global cooling evidence

Forget global warming, Alaska is headed for an ice age
The 49th state has long been labeled one of the fastest-warming spots on the planet. But that's so 20th Century.

In the first decade since 2000, the 49th state cooled 2.4 degrees Fahrenheit.

Previous global cooling articles are visible under the global cooling tag.

America's debt problem

Have you heard the statistic, 40% of the budget expenditure is borrowed? Sometimes described as the government borrowing $0.40 for $1 it spends. If the Tea Party refused to raise the debt ceiling in 2011, the budget would have been immediately cut by 40%. There would have been no debt default, but the U.S. economy would have quickly fallen into a depression. Based on current trends, it is very possible that these cuts are coming anyway. Except instead of reducing spending, the cuts will be made in order to pay for interest on the national debt.

In the chart below I assume a static 3% growth in the budget. Revenues, expenditures and the deficit all grow at 3%. The interest cost number I calculate is based on the total debt, not the public debt. Currently, the government doesn't pay cash interest on the SS Trust fund, it accrues the interest. As the fund is depleted, the difference between the total debt and public debt will converge.

To restate, the model is static. I'm not adding in total interest cost to the debt, I'm only looking at what total interest costs would be assuming the static 3% growth in the debt plus the exhaustion of the SS trust fund. I'm not adjusting the deficit growth for rising interest rates. I assume the debt growth is constant; there is no feedback in the model.

I also assume three interest rates on total debt: the current 2.5%, a higher 3.5%, and a doubling to 5%. These are applied statically to show changes in interest costs starting from 2013, if rates were at this level. For comparison, interest costs averaged 5-6% less than 10 years ago. You can see for yourself at Treasury Direct.

Unless there's a huge unforseen growth spurt in real GDP, the deficit will be relatively constant. If the growth comes through inflation, most spending will automatically adjust, unless there's a decision to cut entitlements. Based on the fiscal cliff battle that increased the deficit, there will be no cuts.

In conclusion, without a positive scenario, the U.S. federal government will become insolvent by the turn of or very early in the next decade. If a negative scenario unfolds, the U.S. could be in crisis before the next presidential election.

A more accurate scenario can be devised, but there a serious constraints. Faster growth will lead to a smaller deficit, but higher interest rates. Stronger employment growth will slow the depletion of the SS trust fund, but stronger employment will push up inflation. Entitlements are growing faster than the economy, and Obamacare benefits will hit in 2014, putting pressure on expenditures to increase faster than GDP.

The main variable here is government spending, and the forces of austerity have suffered a total defeat. Therefore, I believe this "back of the napkin" forecast is relatively moderate.

North Korea is opening up

North Korean leader seeks end to confrontation with South
North Korean leader Kim Jong-un called for an end to confrontation between the two Koreas, technically still at war in the absence of a peace treaty to end their 1950-53 conflict, in a surprise New Year speech broadcast on state media.

The address by Kim, who took over power in the reclusive state after his father, Kim Jong-il, died in 2011, appeared to take the place of the policy-setting New Year editorial published in leading state newspapers.

But North Korea has offered olive branches before and Kim's speech does not necessarily signify a change in tack from a country which vilifies the United States and U.S. ally South Korea at every chance it gets.
I believe it is different this time. Korea is opening up its economy and their only supporter, China, would like to push the United States out of Northeast Asia. North Korea has its owns reasons to end 60 years of self-imposed exile, while China sees reunification as positive for China.