There are three reasons why the U.S Government should default on its debt sooner rather than later. The everyday over-leveraging of the U.S Federal, State, Local Governments, Some Corporations, and Consumers is very well known, and it has been showing signs for many years that it is near to being Totally Insolvent, and way way past the point of no return.
This has long been the case, and most people are bored by the topic. If debt is a problem, it has been manageable for so long that it no longer seems like a problem. The U.S Government Debt has become an abstraction; it has no more meaning to the average investor than the prospect of a comet smacking into the earth in the next hundred millennia.
Many financial commentators believe that Debt doesn’t matter. We still hear ridiculous sound bites, like “We owe it to ourselves,” yet that trivialize the topic. Actually, some people owe it to other people. There will be big transfers of Wealth depending on what happens. More exactly, since Americans don’t save anymore, that dishonest phrase about how Americans owe it to themselves isn’t even true in a manner of speaking; because the U.S oweS most of it to the Chinese and the Japanese.
Another chestnut that American citizens believe whilst they have their head stuck in sand, is “We’ll grow out of it.” That’s impossible unless real growth is greater than the interest on the Debt itself, which is very questionable. And at this point, Government Deficits are likely to balloon much further, not contract, even with artificially low interest rates in the U.S.
One way of putting an annual deficit of, say, $700 billion into perspective is to compare it to the value of all publicly traded stocks in the U.S, which are worth roughly $20 trillion. The current U.S Government Debt of $18 trillion is rapidly approaching the stock value of all Public Corporations — and that’s true even with stocks at bubble-like highs.
If the annual deficit continues at the $700 billion rate — in fact it is likely to accelerate — the U.S Government will borrow the equivalent of the entire equity capital base of the country, which has taken more than 200 years to accumulate, in only 29 years.
You should keep all this in the context of the nature of Debt; it can be insidious.
The only way a society (or an individual) can grow in Wealth is by producing more than it consumes; the difference is called “Saving.” It creates capital, making possible future investments or future consumption. Conversely, “borrowing” involves consuming more than is produced; it’s the process of living out of capital or mortgaging future production. Saving increases one’s future standard of living; Debt reduces it.
If you were to borrow a Million dollars today, you could artificially enhance your standard of living for the next decade. But, when you have to repay that money, you will sustain a very real decline in your standard of living. Even worse, since the interest clock continues ticking, the decline will be greater than the earlier gain, and if you don’t repay your Debt, your creditor (and possibly his creditors, and theirs in turn) will suffer a similar drop.
Until that moment comes, Debt can look like the Key to Prosperity, even though it’s more commonly the forerunner of Disaster. Of course, Debt is not in itself necessarily a bad thing. Not all Debt is for consumption; it can be used to finance capital goods intended to produce further Wealth. But most U.S Government Debt today finances consumption for Home Mortgages, Car Loans, Student Loans, Credit Card Debt, Social Security, and Wars, among other things.
U.S Government Debt
It took the U.S Government from 1791 to 1916 (125 years) to accumulate $1 billion in Debt. World War I took it to $24 billion in 1920; World War II raised it to $270 billion in 1946. Another 24 years were needed to add another $100 billion, for a total of $370 billion in 1970. The debt almost tripled in the following decade, with debt crossing the trillion-dollar mark in October 1981.
Only four and half years later, that Government Debt had doubled to $2 trillion in April 1986. Four more years added another trillion by 1990, and then, in only 34 months, it reached $4.2 trillion in February 1993. The exponential growth continued unabated. U.S Government Debt stood at $18 trillion in 2015. Off-balance sheet borrowing and the buildup of massive contingent liabilities aren’t included. That may add another $50 trillion or so.
When and if interest rates ever rise again, even to their historical average, the U.S Government will find most of its tax revenue will be going just to pay interest. There will be very little left over for the military and domestic transfer payments. When the Government borrows just to pay interest, a tipping point will be reached. It will have no flexibility at all, and that will be the end of the game here.
In principle, an unsustainable amount of Government Debt should be a matter of concern only to the Government (which is not at all the same thing as society at large) and to those who foolishly lent them money. But the Government is in a position to extract tax revenues from its subjects, or to inflate the currency to keep the ball rolling. Its Debt indirectly, therefore, becomes everyone’s burden.
As I’ve said before, I think the U.S Government should default on not just some, but all of its Debt, and there are at least three reasons for that conclusion. First is to avoid turning future generations into serfs. Second is to punish those who have enabled the State by lending it money. Third is to make it impossible for the State to borrow in the future, at least for a while.
The consequences of all of this are very grim, but the timing when it all comes crashing down is hard to predict. Perhaps the government can somehow borrow amounts that no one previously thought possible. But its creditors will be looking for repayment sooner or later. Either the creditors are going to walk away unhappy (in the case of Default).
The other scenario, is that the holders of all dollars are going to be stuck with worthless Paper Currency (in the case of Hyperinflation), or the taxpayers’ pockets will be looted (the longer that things continue to muddle along), or most likely a combination of all three will happen. This will not be a happy story for all but a few who live in the United States.
Author: Doug Casey