Tuesday, December 22, 2009

Here's the elephant in the room

The Global Financial Crisis has not yet begun.

The US dollar, the world's reserve currency and supposedly every central bankers favorite store of wealth, is backed by enormouse debt, and a house of cards waiting to collapse.

It won't be long till the slow Japanese style deflationary slump kicks in as the debt burden continues to grow.

Nothing can go up forever, and eventually something's gotta give. Either the people cut their spending and repay their debts, or the government prints money like Zimbabwe and destroys the currency to keep them spending.

Mike Shedlock has the following post about an interesting Forbes article on the issue nobody in Washington wants to talk about:


Not too long ago, a billion dollars in a governmental budget was a lot of money. Then we got into hundreds of billions. People understood that this was a lot, just because of all the zeros. Now, unfortunately, the number has become small: the world "trillion," as in $1.2 trillion for health care reform, seems so tiny. But it has 12 zeroes behind it, which is so easy to forget.

The total public debt is now at 141% of GDP. That puts the United States in some elite company--only Japan, Lebanon and Zimbabwe are higher. That's only the start. Add household debt (highest in the world at 99% of GDP) and corporate debt (highest in the world at 317% of GDP, not even counting off-balance-sheet swaps and derivatives) and our total debt is 557% of GDP. Less than three years ago our total indebtedness crossed 500% of GDP for the first time."

Add the unfunded portion of entitlement programs and we're at 840% of GDP.

The world has not seen such debt levels in modern history. This debt is not serviceable. Imagine that total debt is 557% of GDP, without considering entitlements. The interest on the debt will consume all the tax revenues of the country in the not-too-distant future. Then there will be no way out but to create more debt in order to finance the old debt.