The Monster in the Room: The World Debt Wall

Posted: Jul 08, 2011 12:01 AM

In his press conference last week, President Obama spent much time attacking Republicans for failing to pass a debt ceiling increase to his liking.  He blamed Congress for running up the bills in the first place, without mentioning it was also his administration and a previous Congress led by Democrats who authored and passed the legislation that so mightily added to our $14 trillion federal debt.

What the President did not talk much about was the current debt crisis in Greece.  There, a Socialist Prime Minister and Parliament have hit a debt wall -- they have in fact spent and taxed that nation to bankruptcy.

Maybe he didn’t talk about it because he knows just how close we, and the rest of the world are, to being in the same boat.  Or maybe he doesn’t know.  Either way, it would be helpful if all our representatives in Washington took a hard look at what’s happening in Greece.

On Thursday, the Greek Parliament voted for an austerity measure that includes a five-year, $40 billion plan to cut spending, raise taxes, reduce public employee wages and move the retirement age from 61 to 65.  The plan also calls for privatization of some government services and selling $71 billion in government assets.

Unfortunately, it may be too little too late.  It’s likely that Greece can’t pay its bills, and all the bankers in Europe can’t change that fact.  What they can and are doing is holding off the inevitable until they can unload as much Greek debt as possible onto private investors and American mutual funds.  They’re also trying to delay a messy Greek default until they can prop up the other nations in Europe who face an imminent debt catastrophe:  Ireland, Spain, Portugal and Italy.

What none of the bankers, politicians and journalists want to admit is that the rest of Europe -- and for that matter, the United Sates -- may soon be facing our own catastrophe.

They have joined their American counterparts in the belief that if we just delay the problem long enough, it will disappear.  They’re afraid, and don’t really know what to do so they do nothing. It’s akin to the 4 year old who thinks if he puts the covers over his head, the monster won’t know he’s there.

There are really only three major differences between the debt crisis in Greece and the debt crisis in the U.S.

First, their debt is much smaller than ours even on a per capita basis.  Second, depending on what maneuvers President Obama and his Treasury Secretary can play to hold off default --we’re still 8 to 24 months away from facing the problems Greece is experiencing now.  And, finally, Greece had somewhere to turn when their debt crisis hit.  We don’t.  By the time our debt crisis turns to catastrophe, the rest of the governments in the world who depend on debt to fund their operations will be in the same boat with Greece and us.

Ireland, Spain, Portugal and Italy are already at the tipping point.  Without major changes in the world’s sovereign debt circumstance, most of the rest of the world will be there soon.

Why?  Because there will be neither an entity left to bail us out, or enough ready money available to borrow our way out of it.

The entire world will have hit the same Debt Wall Greece is hitting now, that point at which there isn’t enough liquid capital in the world to fund the deficits of the 181 nations currently running in the red at a moderate interest rate.

The U.S. is the biggest offender with a deficit this year of at least $1.67 trillion.  The rest of the world needs about $8.5 trillion to fund its annual deficit spending.  But there isn’t the required $10 billion readily available to fund that debt.

So the additional funds will have to be attracted from other markets and investments.  Getting to that money will require governments to bid up the interest rate their willing to pay for access.  Right now, Europe and the U.S. pay about 1.25%.  Once we hit the Debt Wall, it’s likely we’ll be paying closer to double that or more.  Greece is now offering its bonds at 26% and not finding many takers.

While a 3% or 4% interest rate on sovereign debt doesn’t really sound all that threatening, the fact is that it will add $600 billion to our deficit.  That’s when our own austerity plan will kick in.

The debate won’t be whether we should fund college tuition, or health care, or defense.  The debate will be whether we can pay for any of these services while the majority of our revenues go to servicing the federal debt.  Today 42.8% of the federal money spent is money printed or borrowed and that is the U.S. deficit.

Businesses won’t be able to survive huge interest rate hikes.  Jobs will be lost as those businesses fail.  Even more families will lose their homes as unemployment skyrockets.  Retirement savings will be ruined as the markets fall off.  And, of course, pleading a catastrophic fall off in revenues, liberals in Washington will move to tax and control everything in sight.

We have a very short time left before it will be too late to do much of anything at all. The deficit must be cut now.  Our Representatives in Washington don’t have to strain much to see the truth of that.  They only need to watch the news coverage coming out of Greece.

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