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The Nuttle Debt Wall

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The fundamental problem is too much sovereign debt, and too little readily available liquid capital to fund it. Left unaddressed, the world will hit a Debt Wall when ready funds are totally absorbed and governments are left with no choice but to raise interest rates to attract funds from other sources and markets; and/or issue more money thereby debasing the currency and inflating prices.

The current U.S. debt is $14 trillion or $45,000 per capita. Our current budget deficit is $1.5 trillion or $7,250 per adult.

Typically the chief measure of a person’s or corporation’s solvency is its debt to equity analysis. For a nation state it is debt to Gross Domestic Product (GDP). The generally accepted preferred ratio of maximum debt to GDP is 70-80%. Greece is now at 120%, UK is at 125%, and the USA is now at 100%. (Total U.S. debt in 2010 was $14 trillion, while GDP was $14 trillion).

The total liquidity of the world available in all stock markets, bond markets and commodity markets is $140 trillion. These assets, along with new cash, are the primary sources of monies to fund government’s sovereign debt.

Based upon world liquidity, the amount of money available to fund sovereign debt in 2011 is between $6-9 trillion, 10-15% of world GDP of $60 trillion. The world’s government projections for deficit financing in 2011 is $8-10 trillion. We are bumping into the ceiling of the world’s ability to fund ongoing sovereign deficits and debt on an annual basis.

The world’s capacity of sustainable debt at 70% of GDP is $42 trillion. Anything above 70% dictates that interest rates must rise if the world’s economy is to grow. Currently, all governments’ debt totals $58 trillion or 97% of debt to GDP. By 2013, world deficits will produce total debt of $70 trillion and 116% of world debt to GDP.

To fund the ongoing levels of these deficits when the ceiling is reached will require monies be taken out of other exchanges, causing those markets to weaken. When money is taken out of a stock market, that market declines.

The historical average cost of capital in the United States since 1850 has been 4%. If that historical average was being charged today, the interest on our debt would go from $187 billion to $600 billion. To pay for this increased cost, the government would have to borrow even more money and a downward deficit-debt spiral would begin.

When Will the World Hit the Debt Wall?

No one knows for certain when the world will hit the Debt Wall. In testimony before the U.S. Senate 6 months ago or so, Erskine Bowles (President Clinton’s former Chief of Staff and Co-Chair of the National Commission on Fiscal Responsibility and Reform with former Senator Alan Simpson) testified that the U.S. had no more than 2 years to repair it’s debt problems or it would be too late. Senator Simpson testified he believed we had only one year from that point. By their reckoning, we have only 6 to 18 months before it’s simply too late to avoid hitting the World Debt Wall.

The one thing all economists can agree on is that current levels of spending are unsustainable

Unfortunately, this is not a political issue relative to whether we want the federal government to provide schools, libraries, welfare, healthcare or defense. This is an economic issue that if left unattended, means there simply will not be adequate funds to provide the services people may want from government. Ultimately, this isn’t an issue about raising the debt ceiling; it’s about hitting a debt wall at which point there will be no funds available to borrow without paying huge interest rates that draw funds away from the economy and government services.

What Will It Mean When We Hit the Debt Wall?

Life as we know it will change dramatically for every American.

Interest rates may well hit double digits, forcing businesses to operate without adequate float for inventory, materials, facilities and production. Businesses will fail, jobs will be lost, salaries and wages will be reduced.

Home mortgage rates will skyrocket hurting the ability of families to own their own homes. High interest rates will make everything more expensive: cars, boats, appliances, and everything else consumers buy on credit.

Inflation will debase the currencies of the world and assure higher inflation. Family savings will erode and retirement funds will diminish.

And while the salaries and wages of workers will diminish due to higher labor supply but lower labor demand; prices will rise due to higher inflation.

To make matters worse, the government will be under increasing pressure to raise taxes on businesses and families to meet the budget shortfalls.

The economy will enter a death spiral of increasing business failures, fewer jobs, higher prices, higher taxes and stagnant growth.

Liberals in government will use the ensuing economic crisis as a pretext for increasing the size and scope of government. Growing government will exert increasing control into more and more aspects of our economic and personal lives.

What Can We Do About This?

Cut the deficit immediately $500 billion. This will not completely solve the problem but it is an adequate step in the right direction. This is the necessary amount that will alleviate pressure on the funding of 2012 world sovereign debt projections. It is still possible to develop a four-year plan to avert hitting the debt wall, but the plan requires immediate cuts in the deficit.

 

 

 

 

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