The Marc Nuttle Debt Wall
The main problem is far too much sovereign debt, and not enough easily obtainable liquid capital to fund it. Left unaddressed, the world will hit a Debt Wall when ready funds are totally consumed and governments are left with no different but to raise interest rates to attract funds from other supplies and markets; and/or issue more money thereby debasing the money and inflating prices.
The current U.S. debt is $14 trillion or $45,000 per capita. Our current budget deficit is $1.5 trillion or $7,250 per adult.
Often the chief measure of a person’s or corporation’s solvency is its debt to equity evaluation. For a nation state it is debt to Gross Domestic Product (GDP). The typically accepted ratio of maximum debt to GDP is 70-80%. Greece is currently at 120%, UK is at 125%, and the USA is currently at 100%. (Total U.S. debt in 2010 was $14 trillion, while GDP was $14 trillion).
The total liquidity of the world obtainable in all stock markets, bond markets and commodity markets is $140 trillion. These assets, along with new cash, are the dominant supplies of monies to fund government’s sovereign debt.
Based upon world liquidity, the amount of money obtainable to fund sovereign debt in 2011 is between $6-9 trillion, 10-15% of world GDP of $60 trillion. The world’s government projection for deficit funding in 2011 is $8-10 trillion. We’re bumping into the ceiling of the world’s ability to fund current sovereign deficits and debt on an annual basis.
The world’s total capacity of sustainable debt at 70% of GDP is $42 trillion. Anything above 70% requires that interest rates be increased if the world’s economy is to enhance. Currently, all governments’ debt totals $58 trillion or 97% of debt to GDP. By 2013, world deficits will produce a total debt of $70 trillion and 116% of world debt to GDP.
To fund the current levels of these deficits when the ceiling is reached will require monies be taken out of other exchanges, causing those markets to deteriorate. When money is taken out of a stock market, that market declines.
The historical average cost of capital in the United States since 1850 has been 4%. If that historical average was being charged today, the interest on our debt would go from $187 billion to $600 billion. To pay for this increased cost, the government would need to borrow already more money and a downward deficit-debt spiral would begin.
When Will the World Hit the Debt Wall?
No one knows for certain when the world will hit the Debt Wall. In testimony before the U.S. Senate six months ago or so, Erskine Bowles (President Clinton’s former Chief of Staff and Co-Chair of the National Commission on Fiscal Responsibility and Reform with former Senator Alan Simpson) testified that the U.S. had no more than two years to solve its debt problems or it would be too late. Senator Simpson testified he believed we had only one year from that point. By their reckoning, we have only 6 to 18 months before it’s way too late to avoid hitting the World Debt Wall.
The single thing all economic experts can agree on is that present levels of spending are unsustainable
Unfortunately, this isn’t a political issue relative to whether we want the government to provide schools, libraries, welfare, healthcare or defense. This is an economic matter that if left unattended, method there simply won’t be adequate funds to provide the assistance people may want from the government. Ultimately, this isn’t an issue about increasing the debt ceiling; it’s about hitting a debt wall at which point there won’t be any obtainable funds to borrow without having to pay huge interest rates that draw funds away from the economy and government sets.
What Will It average When We Hit the Debt Wall?
Life as we know it will change drastically for every American.
Rates of interest could very well hit double digits, forcing companies to function without adequate float for inventory, materials, facilities and production. Corporations will fail, jobs will be lost, salaries and wages will be decreased.
Home mortgage rates will escalate hurting the ability of families to own their own homes. Excessive interest rates will make everything more expensive: cars, boats, appliances, and everything else consumers buy on credit.
Inflation will debase the currencies of the world and assure higher inflation. Family savings will deteriorate and retirement funds will diminish.
And while the salaries and wages of employees will diminish due to higher labor supply but lower labor need; prices will rise due to higher inflation.
To make matters worse, the federal government will be under increasing pressure to increase taxes on businesses in addition as families to meet the budget shortfalls.
The economic system will go into a death spiral of growing business failures, fewer jobs, higher prices, higher taxes and stagnant growth.
Liberals in government will use the ensuing economic crisis as a pretext for expanding the size and scope of government. Growing government will cause increasing control into more and more aspects of our financial and private lives.
What can we do about this?
Cut the deficit closest by $500 billion. This won’t thoroughly solve the issue but it’s an adequate step in the right direction. This is the needed amount that will reduce pressure on the funding of 2012 world sovereign debt predictions. It is nevertheless possible to develop a four-year plan to avid reaching the debt wall, but the plan demands immediate cuts in the deficit.