us national debt burden_friends of finance_steve feilmeier_cfo & evp koch industries_university of...

8/14/2019 US National Debt Burden_Friends of Finance_Steve Feilmeier_CFO & EVP Koch Industries_University of Tulsa_20100124

1/42

University of TulsaFriends of Finance

January 21, 2010

Steve Feilmeier

EVP & CFO, Koch Industries, Inc.

The views expressed in this presentation are my own and do not necessarily reflect the

positions and policies of Koch Industries, Inc.


2/42

2

Dubai


3/42

3

Dubai Debt Crisis - 2009

Crisis Headlines

Dubai Debt Crisis RaisesFinancial Turmoil FearsDaily Times

November 27, 2009

Debt Crisis in Dubai Has RippleEffects, Could Hurt GlobalRecoveryDetroit Free Press

November 28, 2009

Dubai in Deep Water as RipplesFrom Debt Crisis SpreadThe London Times

November 29, 2009

The Issue

Estimated 2009 debt ~ $80 bn

Estimated 2009 GDP ~ $80 bn

Debt % of GDP 100%


4/42

4

Advanced Economy Debt Loads Similar to Dubai

Source: International Monetary Fund

20

30

40

50

60

70

80

90

100

110

120

1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 2014

Advanced Economies Emerging Economies

Public debt % of GDP


5/42

5

In Fact, of the 43 Most Advanced and Emerging Economies, CSFBNow Ranks the USA as the 14th Most Vulnerable!

Factors: Current account balance, budget balance, government debt, privatesector debt, net external assets, GDP growth potential, credit ratings

Source: Credit Suisse; December, 2009

Top 14

Most Vulne

Iceland


6/42

6

Todays Agenda: Growing Federal and State Debts

USA Debt Levels Historical Review

Status Quo

Future Scenarios

Making Necessary Choices as a Society

Entitlement Reform and Spending Reductions

Less Regulation and More Free Trade

Tax Regime Competitiveness

Personal Responsibility and Considerations


7/427

Home Equity Was a Major Componentof Credit Expansion . . .

Source: Credit Suisse

($bns)


8/428

Low Interest Rates Encouraged Borrowing

U.S. Interest Rates(Shaded areas represent Recessions)

-10%

-5%

0%

5%

10%

15%

20%

1962

1963

1964

1965

1967

1968

1969

1970

1972

1973

1974

1975

1977

1978

1979

1980

1982

1983

1984

1986

1987

1988

1989

1991

1992

1993

1994

1996

1997

1998

1999

2001

2002

2003

2005

2006

2007

2008

10-year Treasury Rates

Real Short-term

Source: CBO


9/429

Capital Inflows Added to the Bubble


10/4210

Foreign Ownership of Treasury Bonds


11/4211

Source: Various, CBO

Consumer Debt Levels in the USA ReachedRecord Levels in 2008


12/4212

Source: Various, CBO

Total Debt (Household, Corporate, Government) HaveAlso Set New Highs in the USA


13/42

13

Consumer Debt Reduction is Now Being Offset byMassive Federal Debt Build Up

Source: US Federal Reserve Bank


14/42

14

Projections Reflect Further Federal Debt Build-Up

12%

16%

20%

24%

28%

2001 2009 2019

Outlays

Revenues

Projected

Federal budget as a percent of GDP

Source: Projections based on Presidents 2009 budget proposal.


15/42

TheU.S. Federal Debt(Percentage of GDP)

15

Civil War

Past

Source: PGPF compilation. Projections based upon official government sources.


16/42

16

Debt as a Percentage of GDP: Many Embedded Risks

Risks to GDP

Sources of GDP

Demographics

Regulatory environment

Spending environment

Federal

State

Risks from high debt levels

Interest rate risk

Potential for higher taxes

Improved competition from Emerging Market economies

Improving tax environment

Improving free trade environment

Improving capital base


17/42


18/42

18

Demographic Shift Could Lead to LessGDP / Higher Entitlements

0

10

20

30

40

50

1962 1972 1982 1992 2002 2012 2022 2032 2042 2052 2062 2072

Percent

Actual ProjectedAge 65 % of ages 20 - 64


19/42

19

Total Government Spending Began Rapidly Risingin the 1960s

Spending

(in

2000

Dollars,

Billio

ns)

Source: Bureau of Economic Analysis


20/42

20

Interest on the National Debt is Growing Rapidly

$158 $181$221 $239 $242

$164$174

$183$194 $212

2004 2005 2006 2007 2008

Held by the Public Intragovernmental Debt Holdings

Fiscal Year Ended September 30

Total Interest Expense

(in billions)

Source: GAO Audit of Bureau of Public Debt Schedules of Public Debt FY 2008

$322 $355 $404 $433 $454


21/42

21

U.S. Debt Maturing in One Year

20

30

40

50

60

1975 1980 1985 1990 1995 2000 2005 2010

Source: Wrightson ICAP

Average maturity = 4 years

% of debt > 10 year maturity = 9%

Shortenedmaturities tolower rates!


22/42

22

Significantly More Downside Than Upside to FederalInterest Expense Forecasts

18% represents historic high from early 1990s

22% would likely result in downgrade to AA

Source: Moodys


23/42

23

The Ultimate Downside Risk is Not Unimaginable

Total debt (inc


24/42

24

Taxation

Q Are higher taxes a solution?

A No, how would we compete for investmentcapital and maintain incentives to work?


25/42

25

Corporate Income Statutory Tax Rates

13

16

1920

252627

283030

3435

0

10

20

30

40

United

States

France Japan Australia United

Kingdon

Italy Sweden Austria Turkey Poland Germany I reland

Perc

en

t

Source: Deloitte Development LLC


26/42

26

Asia: Corporate Rates Decreasing in Small andLarge Countries

Source: Laffer Associates, PWC, Deloitte

Country

Brunei


27/42

27

Top Individual Income Tax Rates

50

45 4543

41 40 40 40 40

35

25

0

10

20

30

40

50

60

Au str ia Au str al ia Ger man y I tal y I rel an d F ran ce Jap an U .K . Po lan d U .S. Tu rkey Swed en

?

Percent

Source: Deloitte. Koch


28/42

28

Emerging Market Competitiveness

Q But isnt the USA still the most advanced andfree economy in the world? Can we grow our wayout of this debt problem?

A Not necessarily Asia / developing countrieshave quickly made progress.


29/42

29

Value of Privatization Transactions in Asia andDeveloping Countries

Annu

al,$Billio

ns

0

10

20

30

40

50

60

70

80

2001 2002 2003 2004 2005 2006 2007

Europe and Central Asia East Asia and Pacific Other Developing Countries


30/42

30

Growth of Free Trade Agreements (FTAs) inIntegrating Asia

0

5

10

15

20

Brunei Cambodia China Hong

Kong

India Indosesia Japan Korea Lao Malaysia Myanmar Phil. Sing. Taipei Thailand Vietnam

2000 2009

Number of FTAs in place by Country, 2000 and 2009

Source: IMF, Asia Regional Development Center


31/42

31

U.S. Stock Market Cap % of Global Stock Market Cap

Source: Bloomberg

53%

44%40%

28%

0%

10%

20%

30%

40%

50%

60%

2004 Jan, 2010

Free Float Total Market Cap


32/42

32

The Federal Spending Process

Budgeted costs Mandatory

Social Security, Medicare, Medicaid

Discretionary

Defense, finance, etc.

Out of budget costs

Social Security entitlements

Medicare and Medicaid entitlements

Special appropriations bills

Stimulus Extended unemployment

War spending


33/42

33Source: PGPF analysis of Office of Management and Budget data.

Mandatory Costs are Growing Rapidly

Net Interest

6%

Mandatory

28%

Discretionary

66%

Net Interest

14%

Mandatory

42%Discretionary

44%

Net Interest

8%

Mandatory

53%

Discretionary

39%

1968 1988 2008


34/42

34

Comparing Debt % of GDP to WWII Levels is NotRelevant

Defense

90%

Net Interest

3%

Mandatory

2%

Discretionary

5%

1945 2014 Forecast

Source: Office of Management and Budget

Defense

20%

Net Interest

12%

Mandatory

58%

Discretionary

10%

Note: 2014 F presumes $4 trn in spending and $3.5 trn in receipts ($1 trn higherthan current levels).


35/42

35

Major Fiscal Exposures($ Trillions)

2000 2008

Explicit liabilities $6.9 $12.2

Publicly held debt and miscellaneous other

Commitments & contingencies 0.5 1.4 E.g., PBGC, undelivered orders

Implicit exposures 13.0 42.9

Future Social Security benefits 3.8 6.6

Future Medicare benefits 9.2 36.3

Total $20.4 $56.4

Source: PGPF analysis of 2000 and 2008 Financial Report of the United States Government.


36/42

36

How Big is Our Growing Fiscal Burden?

Total major fiscal exposures $56.4 trillion

Total household net worth $56.5 trillion

Burden/Net worth ratio 99 percent

Burden

Per person $184,000

Per full-time worker $435,000

Per household $483,000

IncomeMedian household income $48,201

Disposable personal income per capita $33,253

This fiscal burden can be translated and compared as follows:

Source: PGPF analysis of US Government data.


37/42


38/42

38

Threats to Economic Freedom in U.S.

Proposed government policy would severely undermine economic freedom in the future.Trade policy, regulation of greenhouse gas emissions, labor policy, taxes, and the role of government are atthe epicenter of this debate.

Government Property Monetary Trade Credit Labor BusinessSize Rights Freedom Freedom Regulation Regulation Regulation

Economic Stimulus

Individual Tax Reform

Corporate Tax Reform

Repatriation

Business Politicization

Buy America

Universal Health Care

Cap & Trade

Energy Policy

Chemical Security

Card Check

Reversal of Tort Reform

PROPOSED

POLICY

MEASURES OF ECONOMIC FREEDOM


39/42

39

The Path Forward - Government

Implement statutory budget controls that eliminate deficit spending.

Implement special appropriation controls to include all spending aspart of the fiscal budget process.

Reform entitlement programs to reflect significant changes indemographics. Change government accounting policies to forcerecognition of future costs and promises.

Re-engineer and/or privatize the base of the federal government to

focus on the future and generate real results (e.g. the USPS will lose> $7 bn in 2009).

Ensure that we have processes that will enable us to achieve theabove goals within a reasonable period of time.


40/42

40

The Path Forward Business / Individuals

Vote for elected officials that will focus on fiscal discipline, reducedgovernment, and free markets.

Prepare yourself for a global economy that is much less dependenton the United States.

Position your capabilities and assets against a range of potentialoutcomes.


41/42

41

Too Late To Make Change ?

The USA is still the largest and most diverse economy in the world.

Innovation and the power of markets to generate prosperity are stillimportant value drivers

8-10% productivity growth in the second half of 2009

But we must act soon before we become even more vulnerable, andultimately captive to our creditors.


42/42

us national debt burden_friends of finance_steve feilmeier_cfo & evp koch industries_university of...

Documents