The Marc Nuttle Debt Wall

The Situation

The primary issue is far too much sovereign debt, and not enough easily available liquid capital to fund it. Left unaddressed, the world will hit a Debt Wall when ready funds are totally absorbed and governments are left with no choice but to raise interest levels to attract funds from other sources and markets; and/or distribute more money thereby debasing the currency and inflating prices.

The current U.S. debt is $14 trillion or $45,000 per household. Our current budget deficit is $1.5 trillion or $7,250 per adult.

Often the main measure of a person’s or corporation’s solvency is its debt to equity evaluation. For a nation state it is debt to Gross Domestic Product (GDP). The normally accepted desired ratio of maximum debt to GDP is 70-80%. Greece is now at 120%, UK is at 125%, and the USA is now at 100%. (Total U.S. debt in 2010 was $14 trillion, while GDP was $14 trillion).

The total liquidity of the world available in all stock markets, bond markets and commodity markets is $140 trillion. These assets, as well as new cash, are the major sources of monies to finance government’s sovereign debt.

Based upon world liquidity, the amount of money available to fund sovereign debt in 2011 is between $6-9 trillion, 10-15% of world GDP of $60 trillion. The world’s government projections for deficit financing in 2011 is $8-10 trillion. We’re bumping into the ceiling of the world’s power to fund ongoing sovereign deficits and debt on an annual basis.

The world’s capacity of sustainable debt at 70% of GDP is $42 trillion. Anything above 70% requires that interest rates must increase if the world’s economy is to grow.

Currently, all governments’ debt totals $58 trillion or 97% of debt to GDP. By 2013, world deficits will yield a total debt of $70 trillion and 116% of world debt to GDP.

To fund the continuing levels of these deficits when the ceiling is reached will require monies be taken out of other exchanges, causing those markets to weaken. When money is removed from a stock market, that market declines.

The historical average cost of capital in the United States since 1850 has been 4%. If that historical average was being charged today, the interest on our debt would go from $187 billion to $600 billion. To fund this increased cost, the federal government would have to borrow even more money and a downward deficit-debt spiral would begin.

When Will the World Hit the Debt Wall?

No one knows for certain when the world will hit the Debt Wall. In testimony before the U.S. Senate six months ago or so, Erskine Bowles (President Clinton’s former Chief of Staff and Co-Chair of the National Commission on Fiscal Responsibility and Reform with past Senator Alan Simpson) claimed that the U.S. had less than 2 years to repair its debt troubles or it would be too late. Senator Simpson testified he believed we had only one year from that point. By their reckoning, we have only 6 to 18 months before it’s too late to avoid hitting the World Debt Wall.

The single thing all economists can agree on is the fact that present levels of spending are unsustainable

Unfortunately, this is not a political issue relative to whether we want the federal government to provide schools, libraries, welfare, healthcare or defense. This is an economic matter that if left unattended, means there simply won’t be enough funds to provide the services people may want from the government. Ultimately, this isn’t a problem about increasing the debt ceiling; it’s about reaching a debt wall at which point there won’t be any available funds to borrow without paying huge interest rates that draw funds away from the economy and government services.

What Will It Mean When We Hit the Debt Wall?

Life as we know it will change drastically for every American.

Interest rates could very well hit double digits, forcing companies to operate without adequate float for inventory, materials, facilities and production. Corporations will fail, jobs will be lost, salaries and wages will be reduced.

Mortgage rates will skyrocket hurting the ability of families to purchase their own homes. High interest rates will make everything more expensive: cars, boats, appliances, and anything else consumers buy on credit.

Inflation will debase the currencies of the world and assure higher inflation. Family savings will deteriorate and retirement funds will disappear.

And while the salaries and wages of employees will diminish due to higher labor supply but lower labor demand; prices will go up due to higher inflation.

To make things worse, the government will be under increasing pressure to raise taxes on companies and families to meet the budget deficits.

The economy will enter a death spiral of growing business failures, a lot fewer jobs, higher prices, higher taxes and stagnant development.

Liberals in government will use the coming economic crisis as a pretext for expanding the size and scope of government. Growing government will exert increasing control into more and more aspects of our economic and personal lives.

What can we do about this?

Cut the deficit instantly by $500 billion. This won’t entirely solve the issue but it is an adequate step in the right direction. This is the needed amount that will alleviate pressure on the funding of 2012 world sovereign debt predictions. It remains possible to produce a four-year plan to avoid hitting the debt wall, but the plan requires immediate cuts in the deficit.

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