Economic Recovery, Part III – The Debt Bubble
Posted by Warren Peterson on December 1, 2008
You’ve heard of the tulip bubble, the dot com bubble and the housing bubble but not much about the debt bubble. And it may be the worst of all.
The U.S. Federal debt stands at approximately 6 trillion dollars give or take a few billion. It can be argued that as a percent of Gross Domestic Product (GDP), the current debt, while high, is manageable. Compared to the 120 percent carried at the peak of WWII, our current debt at 65% seems low. But even that level is more than double the ratio in 1980. The projected increase in the national debt of over a trillion dollars is considered a temporary investment for economic recovery. The government should recoup most of that money once recovery takes hold or so goes the rosy theory. (See Economic Recovery, Part II)
But the amount of money borrowed by the Feds is only a small part of the story. Add state and local government, corporate and consumer debt and the number becomes a little scary. Reach for the panic button when unfunded liability for items like Social Security, Medicare/Medicaid, retiree health care and pensions is included.
Total Debt (Dollars in Trillions)
$ 6.3 Federal Debt (a)
52.8 Unfunded liability for Social Security, Medicare and other benefits (a)
2.2 State and Local government (may or may not include unfunded liabilities) (b)
10.7 Mortgage Debt (2007) (c)
2.6 Consumer Debt (d)
2.8 Corporate Debt (large loans only) (e)
$144.1 Grand Total
That’s about $472,000 for every man, woman and child, legal or illegal, in the nation.
There are ways to reduce this massive debt or even make it go away.
1. Print money. Sure it would cause high inflation but the debt could be paid down in cheaper dollars. This is not so good if you happen to be invested in debt like mortgages or bonds or expected your pension to buy something near the same level of goods and services every year of retirement.
2. Spend less at all levels. Don’t buy a house unless you can afford a sizable down payment and have a steady job. No more HDTV sets on credit. Governments balance their budgets including liabilities. Unfortunately, we are a consumer credit driven economy with politically motivated budgets.
3. Default. Just declare, “We can’t pay.” The economy absorbed the default of $2.5 billion of Washington (State) Public Power Supply System bonds in 1983. We have weathered corporate collapses (Enron). Personal bankruptcies occur every day. Default is hard on the investor but tolerated by the economic system. Large defaults by government, however, would destroy confidence and drive the United States and the world into a long and deep depression.
4. Grow out of it. This theory says as we grow the economy, our debt becomes relatively less. For this to work, acquisition of new debt has to stop and the debt “due date” has to be long term. Most of the unfunded liabilities don’t fall into the latter category and the political will to do the former is not yet there.
5. Assume the unknown breakthrough. Genetic research discovers the keystone for curing cancer, diabetes and a host of other diseases resulting in dramatically lower health care costs and a much later retirement age saving pension expense. Development of an inexpensive solar powered fuel cell capable of powering homes, factories and all modes of transportation virtually eliminating energy costs unleashes a new era of prosperity.
6. Place head firmly in sand. Watch what you leave exposed though.
One thing for sure, the markets will correct for the debt bubble just as they did for every economic tsunami in the past. The day of reckoning is coming. The question is how soon?
What are your thoughts and ideas? Click the “Comment” button below.