Future generations will no doubt wonder how we missed back to back crises that were staring us in the face. The housing crisis exposed to the whole world how ignorant professionals and average investors alike could be. Without a taxpayer-funded bailout, too big to fail institutions (which ironically have since become too bigger to fail) would have gone under. The same ignorance pervades today leading up to the next major crisis, which is the debt crisis.
I’ve heard it all regarding our debt- nothing surprises me anymore. Debt doesn’t matter because we can print money to pay it off. Interest rates don’t matter because everyone holds 30-year bonds to maturity. We can grow our way out of this. We will save money with a national Health Care program. These are mind-boggling statements worthy of fairy tales.
Today I came across an article via Tim Iacono that showed some scary projections for debt servicing costs in the next decade. Keep in mind that these estimates are courtesy of the CBO, which to be honest, has a pretty horrible track record of predicting budget deficits. For example, in 2001 the CBO predicted average annual surpluses of $850 billion between 2009-2012. Not bad. Only off by about $2 trillion per year!
All joking aside, even according to the CBO, about 79% of the increase in the national debt over the next decade will be due to accrued interest. Someone please explain to me how this is sustainable.
Among the assumptions of the CBO is that yields on the 10-year will rise to only 5% by 2015. I believe the chances of yields being this low are about 2%. On the expenditure side, the CBO fails to account for likely bailouts of states across the board. Prolonged weakness in real estate is another huge problem that isn’t being fully appreciated. Taken together, these problems will make the projections made today by the CBO look laughable.
Rising corporate profits helped to support tax revenues this year, but I don’t think this trend will last. America has one of the highest corporate tax rates in the world. As inflation becomes a concern, American companies, especially those in capital intensive industries, will move abroad. A very hard concept for people to understand is capital flows. Capital fled to the U.S. in a flight to safety, not necessarily because our fundamentals were sound. This is a trend that can be expected in the early stages of a debt crisis. However, the trend will eventually reverse and capital will seek shelter abroad. China is the most obvious hub of capital because they are the global creditor nation. When a shift in capital flows occurs, the downward spiral in our debt situation will accelerate.
Now is the time to prepare for the global debt crisis. This is the calm before the storm, although cracks are starting to show. How many people learned from the last crisis? We will find out soon.