- Over the years I have spoken often about Sovereign debt – the amount of money that Countries owe to their creditors.
- Every so often, the debt burdens in some Countries become so onerous that they are forced to adopt extreme measures in order to balance the cheque book.
- Some simply refuse to repay, some have to adopt austerity measures and stop spending, some print the money (or try to) – but the end result is generally always devastating to the economies of those affected.
- After the financial crisis of 2007-2008 Greece and Ireland were found wanting, and after a long period of Austerity did manage to dig themselves out of a rather large hole.
- Argentina has been a serial defaulter for decades, eventually they elected a far-right wing Government that introduced significant spending cuts and are on the path to recovery, although as poverty levels rise because of reduced Government spending, they may face an electoral backlash in future elections.
- Zimbabwe (and Germany) simply printed more and more worthless money, eventually driving inflation to unmeasurable levels, thus devaluing the currency to the point where people were selling hard assets like property and luxury items, to foreigners, to collect enough value, simply to buy a few loaves of bread.
- Recent history has also introduced a new dynamic whereby the Central Banks buy up (lend money) Government debt, in an effort to prevent long term interest rate yields from rising beyond the point where debt servicing costs place further pressure on Government finances. This has the effect of inflating Central Banks balance sheets, and if they are unable to collect on that debt, they have the ability to monetize those assets by printing. New dynamic – same effect.
- All of which brings me neatly to the mighty US of A.
- Regular readers will know that I have written a few times about the astronomical growth of America's debt.
- To summarize a previous post, here’s a little arithmetical puzzle to contemplate. If you were able to “create” a single dollar every single second of every single day, you would be able to create 60 USD in a minute – easy peasy.
- After one day, you would have about 86 500 USD – about what some top footballers earn in a single day…great result.
- Where am I going with this, you might ask?
- The World’s richest man, Elon Musk, is worth about 360 billion USD, give or take a few billion. At 1 USD every second, take a guess how long it would take to create that kind of value?
- If you guessed 11 000 years, you would be close and win a free subscription to my articles.
- Now, to give you a clue as to how long ago 11 000 years was – people were still wandering around the plains as hunter gatherers. There was no “civilizations’ as such, no cities or towns, only small communities. It would take another 10 000 years before the Greeks came along.
- If you wanted to create 1 trillion USD at a second a day it would take 30 000 years – 30 000 years ago great woolly mammoths were still being hunted, and it would take another 20 000 years before they became extinct.
- US debt as it currently stands is at 37 TRILLION USD. With a giant T.
- To create that kind of money at a dollar a second would take 1 MILLION one hundred and ten thousand years. That long ago Homo Erectus was around and it’s about then that fire was discovered or “tamed’. It was the Ice age. Some of my nastier colleagues would say it’s about that time that I started primary school.
- Ok enough arithmetic – but I think the point has been made …..37 trillion dollars is many, many truckloads of dollars. About 250 thousand of them in fact – filled with 10 USD notes. End to end they would stretch for about 2 thousand kilometers.
- Now it is true that the US economy is also gargantuan – running at around 30 trillion USD p.a.
- However, the US continues to spend more than they generate in tax revenue – about 2 trillions usd worth every year.
- This means that the deficit continues to grow – the absolute value just keeps getting bigger.
- Since 2020 – the year of COVID, the debt pile has grown by about 17 trillion USD – nearly doubling in just 5 years.
- Right now, it's growing at 1 trillion USD every 180 days.
- The debt servicing costs consume 25% of every dollar raised in taxes, and that too keeps growing, meaning less money for services and roads and infrastructure, unless of course you keep borrowing.
- And the Trump administration's answer to this problem is – to REDUCE taxes, partly offset in the hope that increased tariffs (nothing more than a variable VAT) would offset the growing budget deficits.
- For years, decades in fact, no one has worried much about this growing problem. The US enjoyed such hegemony given the dollars status as the global trading currency, that no one bothered.
- USD were recycled back to the US for them to borrow cheaply and keep spending.
- But now, people are starting to take notice.
- Even Trump's BAE – Elon Musk is now shouting very loudly that this is a problem, a very big problem.
- Rating agencies have also finally slowly awakened from their slumber – albeit very slowly, downgrading the US’s credit ratings very slightly for now.
- De dollarization talk is gaining momentum, and other nations are now circumventing the USD, trading with each other in local currencies rather than using the dollar.
- Where does it all end – well, we only have to look at history. It's an age-old problem that has arisen since money and usury were invented.
- The Romans devalued their gold and silver currency by slowly reducing the amount of gold and silver in the coin – purchasing power reduced, or said differently, inflation increased.
- Other nations tried printing the money – that ended well.
- Some defaulted, and yet others simply ceased to be of relevance.
- Some managed to fix their problems through austerity – massive spending cuts that led to economic decline and rising poverty, but it can be done.
- What will the US do – or rather, what will basic economic fundamentals force them to do?
- This is no longer a problem lurking in the background – the spotlight is shining brightly, and the debt collectors are prowling.
- Investors are responding by not reloading their purchases of US debt. They are increasingly buying gold and digital assets, and slowly, the dollar’s value is declining.
- As they say in economics – it’s not a problem until it is. To paraphrase Ernest Hemingway – things happen slowly and then all at once.
- It’s not a question of IF, but when – when do the debts need to be repaid, and how?
