Sovereign debt grows, but Greece is not the problem
The debt problems in Europe in general, Greece in particular, Japan and the UK should be of grave concern to all investors. As the crisis widens and deepens, all currencies are coming under pressure. The US dollar is rising because it is currently perceived to be the least ugly of an ugly bunch. But is it? America's budget deficit (13 percent of GDP) is nearly identical to that of Greece, and its debt as a percentage of GDP is not far behind. And America’s problems are one hundred times the size. In 2009, the US incurred a budget deficit of $1.4 trillion, and its debt rose by $1.9 trillion due to off-budget expenditures. These off-budget expenditures alone were more than the 2008 budget deficit.
At the end of 2009, America’s total debt was approaching 100 percent of GDP, but most investors are unaware of another, far bigger burden: trillions of dollars in unfunded liabilities for Social Security, Medicare and Medicaid. Money the government promised to taxpayers for Social Security has instead been borrowed for its own use. Money the government promised to fund future Medicare and Medicaid benefits and military/government pensions has not been set aside at all. Richard Fisher, a member of the Federal Open Market Committee, believes total US debt – including Medicare and Social Security – is over $122 trillion (Figure 6). This is more than $390,000 for every man, woman and child in the US, and the number keeps rising.
“Fiscally, we are in uncharted territory. Because of this gigantic deficit, our country’s ‘net debt’ is mushrooming… no one can know the precise level of net debt to GDP at which the United States will lose its reputation for financial integrity.”
- Warren Buffett, Chairman, Berkshire Hathaway
When, not if, interest rates rise from their present near-zero levels, US debt payments will soar because every percentage point rise in interest rates adds an additional $120 billion in interest payments. And if inflation were to take hold, rates could easily rise to 10 or 15 percent, as in the 1970s stagflation era. If that were to happen, interest payments alone would gobble up over 90 percent of government tax revenues. With this kind of economic future on the horizon, is it any wonder the US dollar is in irreversible decline?
A much bigger crisis awaits
Current economic conditions are ripe for the onset of another, even bigger financial crisis. Zero interest rates, trillion-dollar sovereign debt, trillion-dollar bailouts and stimulus spending are almost certain to result in spiralling inflation, which could lead to a hyperinflationary depression. Economist John Williams delves into this growing possibility in his Special Report on Hyperinflation - 2010 update. (www.shadowstats.com/article/hyperinflation-2010)
“It is absolutely inevitable that the US will have to ‘default’ on part of its existing liabilities, since the long-run trajectory of government borrowing is clearly unsustainable.”
- Niall Ferguson, author, The Ascent of Money
As confidence in fiat currencies continues to decline, gold prices will rise causing mining stocks to rise as well.
