Why are so many politicians around the world declaring that the debt crisis is “over” when debt-to-GDP ratios all over the planet continue to skyrocket? The global economy has never seen anything like the sovereign debt bubble that we are experiencing today. This insanity will continue until a day of reckoning arrives and the system implodes. Nobody knows exactly when that moment will be reached, but without a doubt it is coming. Are you ready? Words: 1270
So writes Michael Synder (theeconomiccollapseblog.com) in edited excerpts from his original article* entitled The Sovereign Debt Bubble Will Continue To Expand Until – BANG – The System Implodes.
[This article is presented compliments of www.munKNEE.com (Your Key to Making Money!) and may have been edited ([ ]), abridged (…) and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.]
Synder goes on to say in further edited excerpts:
In general, most economists consider a debt to GDP ratio of 100% to be a “danger level”, and most of the economies of the western world have either already surpassed that level or are rapidly approaching it. Of course the biggest debt offender of all in many ways is the United States. The U.S. debt to GDP ratio has risen from 66.6% to 103% since 2007, and the U.S. government accumulated more new debt during Barack Obama’s first term than it did under the first 42 U.S. presidents combined.
If you listen to the mainstream media in the United States, you would be tempted to think that this giant bubble of debt is not much of a concern at all. For example, in a recent article in the Washington Post entitled “The case for deficit optimism”, Ezra Klein wrote the following : “Here’s a secret: For all the sound and fury, Washington’s actually making real progress on debt.” How many times have we heard that before?
About a decade ago, government officials were projecting that we would be swimming in gigantic government surpluses by now. Instead, we are running trillion dollar deficits.
Right now there is a lot of optimism about the economy. The stock market recently hit a 5 year high and the business community is loving all of the false prosperity that all of this debt is buying us. Even Warren Buffett does not really seem concerned about the exploding U.S. government debt. He recently made the following statement: “It is not a good thing to have it going up in relation to GDP. That should be stabilized. But the debt itself is not a problem.”
Oh really? A debt of 16 trillion dollars “is not a problem”? Perhaps we should all run our finances that way. Why don’t we all go out and open up 20 different credit cards, run them all up to the max, and then tell the credit card companies that we can’t pay them back but that it “is not a problem”.
Of course real life does not work that way. The truth is that government debt is becoming a monstrous problem all over the globe. Just check out how debt to GDP ratios all over the planet have grown over the past five years:
- Debt to GDP ratio in 2007: 66.6%
- Debt to GDP ratio in 2012: 103%
- Debt to GDP ratio in 2007: 43.4%
- Debt to GDP ratio in 2012: 85.0%
- Debt to GDP ratio in 2007: 63.7%
- Debt to GDP ratio in 2012: 86%
- Debt to GDP ratio in 2007: 67.6%
- Debt to GDP ratio in 2012: 80.5%
- Debt to GDP ratio in 2007: 39.6%
- Debt to GDP ratio in 2012: 69.3%
- Debt to GDP ratio in 2007: 24.8%
- Debt to GDP ratio in 2012: 106.4%
- Debt to GDP ratio in 2007: 63.9%
- Debt to GDP ratio in 2012: 108.1%
- Debt to GDP ratio in 2007: 106.6%
- Debt to GDP ratio in 2012: 120.7%
- Debt to GDP ratio in 2007: 106.1%
- Debt to GDP ratio in 2012: 170.6%
The Eurozone As A Whole
- Debt to GDP ratio in 2007: 68.4%
- Debt to GDP ratio in 2012: 87.3%
- Debt to GDP ratio in 2007: 172.1%
- Debt to GDP ratio in 2012: 211.7%
So how does all of this end? Well, it is going to be messy, but it is very difficult to say exactly when the system will collapse under the weight of too much debt.
Some nations, such as Japan, are able to handle very high debt loads because they have a very high level of domestic saving. Up to this point, an astounding 95% of all Japanese government bonds have been purchased domestically. Other nations collapse under the weight of government debt even before they reach a debt to GDP ratio of 100%. The following is an excerpt from a recent Congressional Research Service report:
It is hard to predict at what point bond holders would deem it to be unsustainable. A few other advanced economies have debt-to-GDP ratios higher than that of the United States. Some of those countries in Europe have recently seen their financing costs rise to the point that they are unable to finance their deficits solely through private markets. But Japan has the highest debt-to-GDP ratio of any advanced economy, and it has continued to be able to finance its debt at extremely low costs.
When a government runs up massive amounts of debt, it is playing with fire. You can pile up mountains of government debt for a while, but eventually it catches up with you.
Over the past 10 years, the U.S. national debt has grown by an average of 9.3% per year, but the overall U.S. economy has only grown by an average of just 1.8% per year. That is unsustainable by definition.
There is going to be a tremendous price to pay for the debt binge that the U.S. government has indulged in over the past decade. During President Obama’s first term, the amount of new debt accumulated by the federal government breaks down to about $50,521 for every single household in the United States. That is utter insanity.
If you can believe it, we have accumulated more new government debt under Obama than we did from the inauguration of George Washington to the end of the Clinton administration.
Most Americans realize that something is seriously wrong. One recent poll found that only 34% of all Americans believe that the country is heading in the right direction, and 60% of all Americans believe that the country is heading in the wrong direction.
If we keep piling up so much debt, at some point a moment of great crisis will arrive. When that moment arrives, we could see havoc throughout the entire global financial system. For instance, most people don’t really understand the key role that U.S. Treasuries play in the derivatives market. The following is from a recent article posted on Zero Hedge:
This time around, things will be far worse if nothing is solved. If the US loses another AAA rating, then the financial markets could face systemic risk. The reason for this is that US Treasuries are one of the senior most forms of collateral used by the banks to backstop the $600+ trillion derivatives market.
As any trader who trades on margin can tell you, when the value of your collateral is called into question, those on the other side of the trade come looking for you to put up more capital on your trades. This can result in assets being sold en masse (similar to what happened after Lehman failed) and things can get very ugly very fast.
For much more on the danger that derivatives pose to our financial system, please see this article: Coming Derivatives Crisis Will Cause Panic in Financial Markets With Horrific Consequences – Here’s Why.
Once again, nobody knows exactly when the sovereign debt bubble will burst, but if we continue down the path that we are currently on, it will inevitably happen at some point [Read: “This Time is Different: Eight Centuries of Financial Folly” – A Book by Reinhart and Rogoff] and, according to Professor Carmen Reinhart, when this bubble does burst things could unravel very rapidly…
These processes are not linear. You can increase debt for a while and nothing happens. Then you hit the wall, and—bang!—what seem to be minor shocks that the markets would shrug off in other circumstances suddenly become big.
At some point the global financial system will hit the wall that Professor Reinhart has warned about. Are you ready?
[Editor’s Note: The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.]
The U.S. debt situation when broken down to one of family statistics really seems absurd. Yet it’s true. It’s a slow motion train wreck that can be seen coming miles away but which, like deer paralyzed in the headlights, everyone is unwilling to face up to and to take any meaningful corrective action – and it will be the downfall of them all. Words: 550
Many articles are being written these days that more or less scope the dire financial circumstances the U.S. is in. That being said, I had not been able to find one “analyst” – even one – who had the guts to outline the probable outcome and general hopelessness of the situation and to offer any meaningful prescription for investors to survive this coming catastrophe – until now. Words: 710
If Congress does not raise the debt ceiling, the result will be no different than the Jones family deciding that they have maxed out their credit cards and that, if they continue borrowing and spending over their means, there will be significant pain to the family at best and bankruptcy at worst. Any attempt to prove otherwise is futile because it’s just not true! [To further make his point the author provides below 7 other examples of why the economics of government are no different than those of the typical American household.] Words: 585
There has been a lot of media coverage about the United States’ debt issue these days. Why should we care? Because as U.S. citizens, we all own stock in this “company” called the United States of America (let’s say the ticker symbol is USA). We purchased this stock through the various taxes we pay every year (income tax, payroll tax, corporate tax) and we receive dividends through the various benefits we receive every year (security provided by defense budget, Medicare/Medicaid benefits, Social Security benefits, etc.). This article attempts to explain the U.S. national debt in simple layman’s terms by analyzing the United States and its debt issue as if it were a stock investment. Words: 1929; Charts: 5; Tables: 1
“World Debt 101″ examines some of the world’s largest economies and illustrates just how much they have borrowed and what measures many of their governments are now taking to curb spending and narrow those deficits.
People riding a runaway train can party and remain oblivious to the fact that the train is about to crash into a huge obstacle. Our runaway financial train is about to destroy the status quo as it crashes into the obstacle of mathematical consequences – the inevitable financial train wreck. “If something cannot go on forever, it will stop.” [Let me explain.] Words: 974
It is relatively easy to predict further commodity price inflation as a result of the massive money printing going on worldwide and that hard assets, not paper assets, will help protect purchasing power but it is much more difficult to project where else this money printing leads and to what extent a crash is inevitable. What is the endgame? Will it be another financial crash such as in 2008 or will it be a more destructive financial and economic crash that causes a severe but temporary disruption in the delivery of goods and services? Words: 1470
The video* below is one of the best overviews of what is going on and one of the best explanations of what lies ahead that I have heard. As such, in my opinion, it is A Must Watch!
The internet is awash (drowning?) in hundreds of doom and gloom videos providing dire warnings of coming world depression, food shortages, rioting in the streets, rampant (hyper) inflation, deepening banking crisis, economic apocalypse, financial Armageddon, the demise of America – well, you get the idea. Below is a small sample of such videos with a hyperlink to each.
Economic Reason has gathered together the Top 18 ‘reality’ economic documentaries which are bought to you by www.munKNEE.com.
The level of debt has surpassed the possibilities of being serviced. Mathematically, the debt problem cannot be solved, regardless of economic policies. That, unfortunately, is written. For it to be serviceable would be to violate the laws of mathematics and that cannot happen. [As such, America is quickly approaching a catastrophic economic collapse. As repelling as that sounds, it’s in your own best interest to learn just how bad the situation is. This article is an attempt to do just that.] Words: 310
…The US Government and its catastrophic fiscal morass are now viewed by the world as a ‘safe haven’. This would easily qualify for a comedy shtick if it weren’t so serious….[but] the establishment is thrilled with these developments because it helps maintain the status quo of the dollar standard era. However, there are some serious ramifications that few are paying attention to and are getting almost zero coverage from traditional media. [Let me explain what they are.] Words: 1150
Over the past few years, policy leaders worldwide have grown accustomed to kicking the can down the road with each step in this ongoing financial crisis making incremental moves rather than cultivating viable long term solutions. More recent attempts seem to have evolved into simply just trying to kick the can out of the driveway. Now we fear there may not be enough firepower left to simply kick the can over. [Having done so, we are left between the proverbial rock and a hard place.] If lawmakers do nothing, by all accounts we are likely to see a recession. Should lawmakers extend the Bush-era tax cuts, you make no progress towards long term deficit reduction, potentially raising the risk and magnitude of a future financial crisis. [Let me discuss this predicament further and how best to invest in such precarious times.] Words: 1602
The deficits aren’t going to stop anytime soon. The debt mountain will keep growing…Obviously, the debt can’t keep growing faster than the economy forever, but the people in charge do seem determined to find out just how far they can push things….The only way for the politicians to buy time will be through price inflation, to reduce the real burden of the debt, and whether they admit it or not, inflation is what they will be praying for….[and] the Federal Reserve will hear their prayer. When will the economy reach the wall toward which it is headed? Not soon, I believe, but in the meantime there will be plenty of excitement. [Let me explain what I expect to unfold.] Words: 1833
Wall Street has been transformed into a gigantic casino where people are betting on just about anything that you can imagine. This works fine as long as there are not any wild swings in the economy and risk is managed with strict discipline but, as we have seen, there have been times when derivatives have caused massive problems in recent years – the government bailout because of derivatives at AIG; the failure of MF Global because of bad derivatives trades; and the 6 billion dollar loss that JPMorgan Chase recently suffered because of derivatives – [but the next] derivatives panic that comes will destroy global financial markets, and the economic fallout from the financial crash that will happen as a result will be absolutely horrific. [Let me explain my contention.] Words: 1485
The derivative market has blown a galactic bubble…and since there is literally no economist in the world who knows exactly how the derivative money flows or how the system works,…we really don’t know what will trigger the crash, or when it will happen, but considering the global financial crisis this system is in for tough times. [If, and when, it happens it] will be catastrophic for the world financial system. If you ever wanted a tool to help yourself or others visualize the staggering magnitude of US debt and derivatives, the infographic below is a good one to share. It visualizes who those 9 too-big-fail banks are, what their derivative exposures are, and what scandals they’ve been lately involved in. Words: 1915
The term “derivative” has become a dirty, if not evil word. So much of what ails our global financial system has been laid-at-the-feet of this misunderstood, mischaracterized term – derivatives. The purpose of this paper is to outline the origin, growth and ultimately the corruption of the derivatives market – and explain how something originally designed to provide economic utility has morphed into a tool of abusive, manipulative economic tyranny. Words: 3355
To achieve the EW target of $4,500/ozt. on the next upward move [in gold that I laid out in my article Alf Field: Correction in Gold is OVER and on Way to $4,500+!] will require something to trigger substantial new buying of gold. What could that event be? By definition, it will be a surprise to all market participants, a “black swan” event. That doesn’t prevent us from making a guess [and] one likely area from which problems could emerge…[would be] derivatives. [Let me explain why that might well be the case.] Words: 591
The problems of the US government are insoluble. They will result in the sovereign default of the federal government and the collapse of the US economy. Monty Pelerin explains why: “The claimed debt of the Federal Government of $16 Trillion is enough to threaten its viability and that of the US economy. The current glide path of spending and revenues ensures that debt will increase. Explicit and implicit Treasury guarantees will be required to bail out failing public and private agencies. The situation becomes hopeless when the unfunded liabilities are taken into account.”
In today’s overleveraged world, greater deficits and government spending, financed by an expansion of public debt and the monetary base (“the printing press”), are not the answer to our economic woes. In fact, these policies have been proven to have a negative impact on growth. [Therefore] as long as we continue down this path, the “solution” will continue to be the problem. There is no miracle cure to our current woes and recent proposals by central planners risk worsening the economic outlook for decades to come. [Let us explain.] Words: 1510
At the risk of looking/sounding like some crazed religious fanatic usually seen carrying a sign or proclaiming: “Repent, the end is near,” I shall avoid the word “repent”. To me, the rest of that proclamation appears accurate and reasonable, at least with regard to our economic condition. [Let me explain:] Words: 1896
Our empirical research ( Growth in a Time of Debt) on the history of financial crises and the relationship between growth and public liabilities shows that burdens above 90% are associated with 1% lower median growth – and the United States’ debt level is currently hovering around 90% on a gross basis and 60% netting out assets. Politicians like to argue that their country will expand its way out of debt but our historical research suggests that growth alone is rarely enough to achieve that…[given] the debt levels we are experiencing today…[As such,] we need to be cautious about surrendering to the “this-time-is-different” syndrome and decreeing that surging government debt isn’t as significant a problem in the present as it was in the past. [Let us explain why.] Words: 1175
It is clearly evident that America’s debt picture is truly astronomical and, like the situation with Greece, the debt cannot, and never will, be repaid. Indeed, any way you look at it, the consequences for the United States, let alone the many other haunted economies, are grim, dismal – even disastrous. Words: 1166
Highly leveraged economies, particularly those in which continual rollover of short-term debt is sustained only by confidence in relatively illiquid underlying assets, seldom survive forever, particularly if leverage continues to grow unchecked. Words: 1264