Is It Too Late? Is It EnevitableThat The Debt Will Crush The World Economy?

It has been a while since I have done a post on the economy and the debt bubble that has engulfed the United States and Europe and most of the world. In part this because the subject is so depressing. It is difficult for me, as I read more and more about the debt crisis, to see any way that the US or the world, for that matter, can work its way out from under the crushing weight of the debt they have incurred.

In the United States, we tend to focus on our $16 trillion national debt, which is horrendous and growing at over a trillion dollars per year. Some argue that we need only concern ourselves with the debt that is owed to the public or $11 trillion because the rest is inner-government debt and there is no legal obligation to pay it off. But, these same people never talk about the political price of not paying them off.  Other pundits would say these two numbers are but the tip of the proverbial iceberg. Let’s take a look at where the US is today.

Scott Powell, writing for the  Orange County Register, reminds us that it was just a year ago that America lost its AAA rating. He also reminds us that since that time our national debt has increased from $10 trillion to $16 trillion.  Here are a couple of excerpts from his article:

In fact, a debt-driven collapse of the U.S is closer than most Americans realize. Consider what has happened in Spain and Italy, respectively, the world’s 12th- and eighth-largest economies. Just ten months ago Spain and Italy carried AA ratings, but today their debt ratings have plummeted to near-junk levels, at Baa3 and Baa2, respectively, driving their 10-year bond yields above 6 percent.

Since the deficit-to-GDP ratio of the United States is worse than that of Spain and Italy, higher funding costs for U.S. debt may come sooner than Fed Chairman Ben Bernanke forecasts. Recession or war would further blow out the deficit and accelerate debt rating downgrades. Either crisis could cause U.S. debt service costs to sharply rise and potentially trigger a downward spiral ending in a failed U.S. Treasury auction and a subsequent liquidity crisis. As happened in Greece and more recently in Spain, the U.S. could face funding shortfalls only solved by money printing, which would likely trigger unacceptable inflation.

Not very encouraging, is it? If our bond interest rate was pushed to 6%, we would be done for. Our debt service cost would climb to nearly a trillion dollars annually. There are two reasons the US isn’t  in the same shape as Spain today: the dollar is the world’s reserve currency and Europe is in worse shape overall making US Bonds still the only safe heaven for investors to park their money. How long will that protect us? I can’t help but agree with Mr. Powell’s sentiment:

Sadly, things are worse today than they were a year ago when the U.S. lost its AAA rating from S&P. The national debt has grown by nearly 11 percent while the economy has grown by only 2 percent. And over the past four years of various government spending programs, debt has grown by 60 percent while GDP has grown 7.7 percent. So much for the benefits of Keynesian stimulus. Washington’s policies have left the country without shock absorbers or an effective insurance policy to counter another crisis.

Monty Pelerin, one of my favorites, writes that The Government Is Bankrupt and Will Destroy the Economy.

Most people don’t understand the unsolvable problem the U.S. government has created for itself and its citizens.  Sovereign default is beyond a likelihood; it is inevitable.

When and which (possibly all) obligations are defaulted on will be determined by panicked politicians under duress.  A complete financial and economic collapse appears unavoidable.  I hope that is the worst that will occur.

I urge you read Pelerin’s article; especially the part that talks about  The Glide Path, Treasury Obligations, and Unfunded Liabilities. He describes very well the iceberg mentioned earlier.

Estimates of the present value of these obligations range from $50 trillion to over $200 trillion, depending upon the actuarial assumptions made.  Gary North uses Laurence Kotlifkoff’s figures and explains the calculation (my italics):

The total obligation of the federal government to voters that is not funded at the present time is now $222 trillion. This does not mean that, over the entire life of the program, the government will be short $220 trillion. It means that the present value of the unfunded liability is $220 trillion. This means that the government would have to set aside $220 trillion immediately, invest this money in non-government projects that will pay a positive rate of return, and will therefore fund the amortization of this debt. I have written about the estimate here.

And, Pelerin concludes

The claimed debt of the federal government ($16 trillion) is enough to threaten its viability and that of the U.S. economy.  The current glide path of spending and revenues ensures that debt will increase.  Explicit and implicit Treasury guarantees will require additional debt to bail out failing public and private agencies.  The situation becomes hopeless when the unfunded liabilities are taken into account.

Buckle up for a very scary ride.

As I said at the beginning, trying to understand the debt crisis waiting for us and the world is very depressing. It is highly unlikely that even a Romney-Ryan administration would do enough, fast enough, to prevent the collapse of our economy. Please come back tomorrow. I will be dusting off my tin-foil-hat and will tell you what the banksters have in mind for us.

Well, that’s what I’m thinking. What are your thoughts?

15 thoughts on “Is It Too Late? Is It EnevitableThat The Debt Will Crush The World Economy?

  1. It is a fascinating $64 trillion question: when is the global hot money stop parking in US Treasuries? When will the world find another reserve currency?
    As of now, there are no takers. Yes, global investments may demand higher insurance premiums (higher interest rates) out of the US dollar, and that will give us a further shove towards losing our reserve position, but it will take time and a viable substitute.
    That substitute can only be China. But if we are losing rapidly our “Rule of Law” crown (respect and rights for private contracts), China never had them, and is not yet close to getting them.
    We are still the least-bad of all choices.
    The size of Switzerland, and other respected fiscally responsible nations, prevents them from becoming reserve currencies. In fact, they don’t want to and fight it vigorously.
    Of course, the other alternative would be to go back to the gold-standard. And to me, that is the only alternative, possibly after four more years of Obama.
    Fascinating subject.

    PD. Not to nick-pick on Mr. Powell, but we are not worse off than Italy (123% debt to GDP). Yes, we are worse than Spain (69% Debt to GDP), but Spain is not a money parking center.

    1. I agree with you, John, on no one being ready ot willing to take on the being the rederve currency. However, if (or should say when) the Euro Zone comes undone, all bets are off. If the markets crash and everyone goes to US bonds, there will be panic because the bonds will have a net negative return.

  2. I don’t know what a financial collapse of the US system would look like, nor do I know what will happen to all the Joe-Six-Packs like me. I believe it would be ugly, and we would most likely loose our money invested in the stock markets, and our senior citizens that depend on Social Security and Medicare would be up crap creek. This means no money for food, no health care, and no way to care for a sizable portion of our nation.

    Most working people would still have jobs, but many government employees would be dumped on the street, all be it about twenty years too late. Would prices go up or down? I don’t know if we would have inflation or deflation. Either one can destroy the monetary system.

    All in all, we would lose. Maybe someone smarter than me can fill in some details.

    1. It would clearly be very ugly, Bob. I’ll give you my tin-hat preview of tomorrow’s post. One potential trigger would be if the Euro Zone comes undone. Markets would crash and there would be an initial deflationary period. The money people would rush into US bonds; but that’s a problem because the bonds ha negative return adjusting for inflation, The major banks would come crying to the central banks that the world is ending and insist that the only thing to so is turn on the printing presses and payoff all debts ( completmonotize the debt.). That would obviously bring on hyperinflation; but not before the bankers, who are first in line, have had a chance to exchange all of the soon to be worthless dollars for hard assets like gold, silver, farms, factories, mines, and etc. For the rest of my tin-hat story you will have to come back tomorrow. 🙂

  3. Why doesn’t anybody understand that you can’t spend more than you have? When did Americans get this stupid or this demanding?
    I think the Left’s convinced so many people we CAN just keep giving that most people actually believe it……..and “better to get freebies than work” seems to be a pretty popular mindset.
    it’s scary and we’ll probably get obama again…then, I’ll be glad at least I knew the America that was so great. Our kids are losing so much. But, when teachers don’t teach the Pledge or the Patriotic songs and when they look to slam America every chance they get (which has been happening for a long time) , what can we expect?

  4. “we tend to focus on our $16 trillion national debt, which is horrendous and growing at over a trillion dollars per year. Some argue that we need only concern ourselves with the debt that is owed to the public or $11 trillion because the rest is inner-government debt and there is no legal obligation to pay it off”

    What if we don’t pay off the debt that has been incurred by the government? See a government can never become bankrupt as they have the money making weapon. But what if the US starts creating millions of dollars and inject it into the economy? The economy will no doubt ruin as there would be a hyper-inflation, like that one of Germany (during 1923 – 24, after the WWI and due to cover up the massive war debts) or of Zimbabwe ( estimated at 6.5 sextillion percent in mid-November 2008. In 2009 Zimbabwe abandoned its currency; at present in 2012 a new currency has yet to be introduced, so currencies from other countries are used.).

    But what is the political price?

  5. At least with Romney, their is a chance of going down fighting. To simply end our Nation as it is with Obama and his Marxist friends would be the 1930’s all over again. This time we would share the fate as did the Jews. I really believe that. Consider me part of the tin foil hat crowd.

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