The nation of Greece is currently at the center of a debt meltdown due to its ridiculously high spending habits in the past. Thanks to out-of-control spending, the Greek national debt has climbed to about 113% of GDP. A result of that is that investors consider Greek debt more risky, and are only willing to loan money to Greece at a rate of 7.48% per year. What does this have to do with us? Our stats indicate that we could be headed for a similar situation.
For the last four decades, the United States has shown itself quite unable to pay its bills, and so we’ve borrowed shockingly large amounts of money. Our debt has climbed to 89% of our GDP, but because of the historical strength of the US, people trust us enough that we’re only being charged about 3.3% per year on our debt. So what, you ask? We’re clearly better off than Greece.
Well, yes, for the moment. The problem is that we borrow more and more each year, at this point borrowing almost 10% of our GDP per year. That means our debt-to-GDP ratio will rise. If present trends continue, we’ll owe 99% of our GDP in a year from now, 109% of our debt two years from now, and a shocking 119% percent of our GDP by 2013. That’s a worse debt than held by Greece currently, and at some point confidence in our ability to repay must begin to erode.
Indeed, it’s eroding even now. As I reported to you before, the confidence of the market has eroded to the point that Warren Buffet is considered a safer bet, and therefore pays a lower interest rate than, the US govt when borrowing. This is a ridiculous situation, and shows that the business world is increasingly awakening to the impossibility of repaying a national debt the size of ours. If the markets current fear of US debt continues to climb proportionally as our debt climbs to Greece’s levels, it’s very likely that our interest rate will rise. In fact, Greece’s interest rate now may be lower than what we’ll be paying three years from now, because in the case of Greece there’s at least possibility that the European Union will bail Greece out, while there’s no country big enough or willing enough to bail the US out.
But let’s suppose that our interest rate only climbs to 7.48% in the next three years. Currently, it’s at about 3.3%, so our speculative projection shows the interest rate more than doubling while the debt climbs by 30%, causing our annual debt payments to swell from 400 billion to about 1215 billion, or just over 57% of our current tax revenues.
Can we devote 57% of our tax revenues to treading water with the national debt and limp along of the remaining 43%. Since we’re currently spending 167% of our annual revenues, that would mean we’d need to cut out 74% of our current level of spending just to break even at that point. And that’s just plain unrealistic to think our government can cut spending that drastically. Instead, what’s more likely is that we’ll feel compelled to keep racking up debt until we suddenly can’t find any more lenders, at which point we go bankrupt. And if these numbers are correct, that could happen as little as three years from now.
Ronald Reagan, who was so famous for being a model conservative, himself once famously said that the deficits were “big enough to take care of themselves.”
Now, the numbers tossed around were, of course, only a possibility, based on present trends. There’s all sorts of different ways it could play out. But one thing is clear: if we allow present trends of unlimited spending to continue–if we continue our 40-year old habit of letting deficits take care of themselves–we are headed for a national government debt meltdown the outcome of which is rather difficult to predict.
It’s about time we wake up about our spending habits, before the market awakens us to the unpleasant truth at a time we’re unprepared for.
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[...] I wrote a post entitled, “Does This Make Me Alarmist?,” in which I outlined, based on real data, an ugly possible scenario for a U.S. debt crisis [...]