World Wide Sovereign Debt

Is the world ready to accept new much higher sovereign debt levels? This question and the answer that plays out over the next 12 months will determine our economic future in the US, Western Europe and potentially Japan.

For an affirmative answer, we need to thread the needle by keeping our national debt service costs low, begin creating jobs and therefore tax revenue and show the debt-holders that we have the ability and desire to pay them back.  The Fed can keep interest rates low for years and print money to buy mortgages and treasury bonds to meet that end.  As the word deflation creeps into more and more news stories, I can see Ben looking over his shoulder at the highly polished printing press keenly.  As for jobs, not many large companies are looking to hire in part because of the unknown of benefits costs and a general concern for future economic conditions.

US Corporations deploy capital and labor worldwide and adjust their structure accordingly to capture the parts of the world that are growing.  Reading the annual reports from 2008 and 2009 of many of these corporations paint a striking pattern as they clearly reference where future growth is expected and it is not the US and Western Europe.

On the other side, what would it take for countries, banks and institutions to stop buying US Treasury Bonds?  Last month, Bloomberg.com ran a piece quoting Ed Yardeni: ““Central banks, by keeping rates near zero have basically covered the bond vigilantes in duct tape,” said Edward Yardeni, who coined the term in 1983 for investors who protest inflationary monetary or fiscal policies by selling bonds and driving up government borrowing costs. “They have stymied (bond vigilantes) from expressing their displeasure over runaway government deficits and social welfare spending.  We are not getting any votes of protest from the bond vigilantes in the U.S. because short-term rates are so low.””

Countries, banks and institutions are still buying US Treasuries for now…

In less than 8 years, our national debt is projected to reach $20 trillion or about 130-140% of projected GDP.  Currently, the Social Security System is paying out more in benefits than it collects.  Jim Rogers plainly lays out a piece de resistance:  “And as for the U.S., it’s not just the largest debtor nation in the world, it’s the largest debtor nation in the history of the world, and that has always ended badly. There is no case in history where a country has gotten itself into gigantic debt that it eventually hasn’t had a crisis or a series of crises. We may not like it, but the fact is, we have spent decades of future productivity and growth and we have a historical situation facing us. So the U.S. is in relative decline or absolute decline, going the way of the U.K. or Spain or Portugal or other countries. All the largest creditor nations are now in Asia: China, Korea, Japan, Taiwan, Hong Kong, Singapore.”

Jim’s point should not be ignored.  What is the borrowing limit for the US?  Can we sustain $1 trillion deficits?

About Matthew Kolesky

Matthew Kolesky is a Principal at ACM, Inc. and joined the firm in 2004. Matthew Kolesky was born and raised in Alaska and has served on many Anchorage area non-profit boards.