Thursday, July 21, 2016

Everyone is Ignoring the Sovereign Debt Problems

Economic forecasters paint a pretty rosy future for the US and Europe.  The forecasts seem to be independent of the historic levels of debt that every developed country has accumulated in the last two decades.  The West and Japan have been on an unprecedented spending binge far exceeding their resources.  This has been financed by exploding sovereign debt.  Greece is the most prominent example of what eventually happens when debts explode while GDP remains stagnant.

No western countries have any real GDP growth.  Even the 2 percent rates in the US are pitiful by any historical comparison with past GDP growth in the US.  But the Eurozone has nothing, zip, in the way of economic growth.  All that grows in Europe is the level of sovereign debt.  Everything else stagnates.

So, what is the future for these countries?  There really is no economic future for the Western countries.  They have opted for stagnation and they are getting it.  The US is limping toward the end of its historic economic expansion that began at the end of the 19th century civil war.  The clamps are on and the private sector is in retreat--what's left of it.  The economic debate in the US has now shifted to how to divide a shrinking pie.  No one really believes economic growth is possible any longer and one major political party seems opposed to economic growth in principle.

With no economic growth in the future, the levels of sovereign debt continue to explode.  It was once argued that 70 percent of GDP is the maximum debt level for a country before debts become unsustainable.  No western country is now below that level.  When rates start heading up, simple debt payments will consume all of these countries annual fiscal budgets.  Entitlements will be slashed either directly or by currency inflation.  There is no alternative.  It is simple arithmetic.

There is an inflation and interest rate take-off in our future, implied by the burgeoning levels of sovereign debt and the central bank monetization of that debt.  Financial assets will be punished when this sovereign debt disaster begins to implode.

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