This article is a guest contribution by David Rosenberg, Gluskin Sheff, Toronto.
We get it. The United States is not Greece. Nor is it any European country. It is the U.S.A. We get it. Best political system. Best economy. Most ingenuity. Reserve currency. We get it. And, the U.S. is never going to default on its obligations because it is, in fact, the world’s reserve currency and as such has full control of the printing press. And, nothing above was meant to be facetious.
As hedonistic as it is, the U.S. economy is the most flexible and adaptable economy, and for a whole host of reasons. At the same time, the national balance sheet is grim. The national debt/GDP ratio is about to pierce 100% and that does not include the state/local government morass nor the wave of off balance sheet items and underfunded liabilities, which would then take that ratio north of 500% (also see Gillian Tett’s article in today’s FT — Look at State Finances for the Real U.S. Budget Squeeze). That is the grim truth.
Even with low interest rates, the massive debt bulge has become so large that interest charges on the public debt are within three years of absorbing over 30% of the revenue base, which then makes it that much tougher to reverse course. In other words, the fiscal problem is becoming increasingly structural and we are already at the stage where even if the economy were running flat out at full employment, the deficit would still be over 7% relative to GDP. At some point, this will begin to impede economic progress.
