The question was asked: When would the US debt pass world GDP? When this happens it would take one year of the world’s total output to pay off the US Debt. How would the US debt be funded when this occurs? And as it approached this point, when would the other countries that we are borrowing from say, “No more”?
Some calculations were made using the formula provided in Part two of this series.
The IMF indicates that world GDP will be 4.3 % next year and world GDP is 62 trillion dollars; that is the US economy is 22.5% of world GDP. This was used as a proxy for the future growth rate. The US debt growth rate used in these calculations was 9% (a bit conservative). When was the crossover or the point that the US debt equaled world GDP? This occurs in 35 years. At 4.9% world growth rate, the crossover is 40 years, at 3.5% growth rate 30 years, 2.5% growth rate 25 years, 1% growth rate 20 years and no world growth the crossover is in 18 years. The US debt was assumed to chug along at 9% annual growth rates. And with the recent >26 billion dollar teacher bailout (8-10-10) there is no expectation on the horizon that the United States will be fiscally responsible any time soon.
In an earlier article, another calculation on the US debt as a home mortgage was presented. If the Congress could stop the debt growth at $15 trillion and borrow all the money at 2% interest rate it would take budget surpluses of 500 billion per year for 50 years straight to pay off the national debt. Remember that the current debt is nearly $1.5 trillion per year so there is nearly a $2 trillion dollar swing needed in the budget of the US government to pay this off.
Now place on top of this the 1.2 trillion dollar State Government debt and the nearly 2 trillion dollar local government debt and the 110 trillion dollar unfunded liabilities of the US government (Social Security, Medicare, and prescription drugs) and the total personal debt of 16 trillion dollars and the result is one gargantuan pile of debt.
Today this totals: 142.7 trillion dollars of debt.
Rising interest rates on the debt will cause the debt load to rise, further exacerbating the exponential debt growth. Inflation will cause the debt load to increase as this drives increased spending. Compounding this is that as debt crowds out borrowing for productive purposes, GDP growth is reduced again. Reduced growth only hastens the end of the game. Lastly, taxes will have to go up, further reducing economic growth. Almost every economic lever has already been pulled to keep the economy on the road. It is about to fall off the road and over the cliff. Like a death spiral, it comes!
The point of no return will be when investors loose confidence in the government’s ability to manage the debt. This will occur sometime in the near future. And when it happens it will happen so rapidly that no response by the government will contain the problem, much to Washington’s chagrin.
These are warning shots by the Heritage foundation, CBO, BIS, IMF, WSJ, Gundlach, the CBPP and now with this analysis. But the legislative branch responsible for the budget of the United States according to the US Constitution is collectively deaf, dumb and blind to the warnings. And the government is not like the messianic deaf, dumb and blind kid playing pinball in the rock opera Tommy. That “Pinball Wizard” became part of the pinball machine always playing clean. He played by intuition, he had no distraction, buzzers or bells and didn’t see the lights flashing but instead played by the sense of smell. He always got the replay and no one has seen him fall. That deaf dumb and blind kid sure played a mean pinball. THIS pinball wizard, our deaf, dumb, and blind legislature, shall be quite different as the catastrophe of the collapse of the US financial system has no messianic savior, but rather has perpetrators who purposely desire the utter destruction of the western capitalistic economy by discrediting it. Why? In my opinion, once a Republic (America is a Republic) is discredited, it can then be replaced with another form of government. So which other form of government will it be: fascism, socialism, communism, a dictatorship, monarchy, one world government, or other? Do any of them have any credibility to solve the debt problems? Whatever the answer, is there proof is the next question.
About the Author: William J. Michie, Jr. has a BS and MS degree in Chemical Engineering from Drexel University and an MBA degree from Rutgers University. He has had a 32.5 year career in Polyethylene Product Development with Union Carbide and Dow Chemical Corp. and is the holder of a number of patents. H. Marsman and D. Madio also contributed to this article.