If a country’s growth rate is higher than the growth in the interest cost of servicing its debt, a debt model is sustainable. A business can only roll over it’s debt, if it’s capital base grows faster than the cost of servicing that debt, and same holds true for government. This is basic finance. The average interest rate on all outstanding government debt is 3.587% and our growth rate is no where near this, and won’t be for the foreseeable future.
Growing at a slower rate is fine when total debt is below GDP, because there is a spread for financing debt by issuing more debt. However, this model completely spins out of control when national debt is above GDP for an extended period of time, because it’s becomes impossible to service debt by issuing more debt. This is the concept of negative leverage, and no bank or investor would lend money to an institution (government or business) that has faster growing debts than equity for an extended time period, because in the long run bankruptcy is inevitable.
The seriousness of this can’t be emphasized enough — UK’s national debt is now in excess of 100% of GDP and is on verge of losing it’s triple-A credit rating. This is unbelievable, and frighteningly scary. Is our economy so much stronger that we can carry the massive debt load this president is putting on our shoulders? Our current national debt is $11.2 trillion, and with President Obama’s irresponsible spending, we will surely add $3 trillion dollars by the end of his first year in office. Our current GDP is approximately $14 trillion, and President Obama’s deficit would put our debt above 100% of GDP.
Brazil and China are meeting this week to discuss methods to conduct business between their countries in their own currencies; this deals a serious blow to the idea that the dollar is the universal currency. If two of the worlds fastest growing economies start dealing outside the dollar, and furthermore if they start offloading their dollar backed reserves, it could put tremendous pressure on the Treasury markets as demand for dollars will suddenly dry up.
The only way for America to survive in the long run is to grow it’s way out of debt. Small business is the America’s growth engine, and for businesses to grow they need capital. Capital lets business develop, build, buy equipment, employ workers, and this President and his Congress are waging a war on capital and destroying our prospects of growth. There are talks of increasing taxes on corporations, increasing capital gains, and introducing wealth taxes. Taxes reduce available capital, take it out of private hands, and effectively reduce the ability of businesses to grow.
I’ve never been bearish on America’s long term outlook — till today. I love this country, and it’s scary to see where we are heading.