The Looming Debt Crisis: A Disaster of Unprecedented Proportions


by James Rickards

With debt levels reaching all-time highs in major developed and developing economies, and with debt-to-GDP ratios also in record territory (not including contingent liabilities such as Social Security, health care and other entitlements, which make matters worse), it seems time to consider just how nations will deal with this problem.

The debt crisis may not be imminent, but it is unavoidable. When it happens, it may present the greatest financial disaster of all time. It’s never too soon for investors to consider the fallout.

When you issue debt in a currency you print, there’s no need for default in the sense of non-payment.

You can just have the central bank buy the debt (by printing money). This is the situation today in the U.S., Japan, the U.K. and the European Monetary Union (the countries that use the euro). They all have huge debt burdens, but they all have central banks that can simply buy the debt by printing money to avoid default.

Non-Payment Is Not the Issue

There are many bad consequences to printing money and storing up debt on central bank balance sheets, but non-payment of debt is not one of them. This is the mantra of the Modern Monetary Theorists (MMT) and their thought leader Stephanie Kelton.

In my view, MMT is garbage as economic policy, but the no-default tenet is valid. George Soros says the same thing.

That said, we are well past the point where the debt can be managed with real growth. That threshold is about a 90% debt-to-GDP ratio. A 60% debt-to-GDP ratio is even more comfortable and can be managed.

Unfortunately, the major reserve currency economies are all well past the 90% ratio as are those of many smaller countries. The U.S. ratio is 134%, an all-time high. The U.K. ratio is 102%. France is 111%. Spain is 112%. Italy is 145%.

China reports a figure of 77% but this is highly misleading because it ignores provincial debt for which Beijing is ultimately responsible. China’s actual figure is over 200% when provisional debt is included.

The champion debtor is Japan at 261%. The only major economy with a halfway respectable ratio is Germany at 67%. It’s Germany’s misfortune that they are probably responsible for the rest of Europe through the ECB Target2 system.

All these countries are headed for default. But we must consider the different ways to conduct a default.

There are three basic ways to default: non-payment, inflation and debt restructuring. You can take non-payment off the table for the reason mentioned above — you can always just print the money.

The same goes for restructuring. Inflation is clearly the best way to default. You pay back the money in nominal terms, but it’s worth very little in real terms. The creditor loses and the debtor countries win.

Nice and Easy Does It

The key to inflating away the real value of debt is to go slowly. It’s like stealing money from your mother’s purse. If she has $50 and you take $40, she’ll notice. If you take one dollar, she won’t notice. But a dollar stolen every day adds up over time.

This is what the U.S. did from 1945–1980. At the end of World War II, the U.S. debt-to-GDP ratio was 120% (about where it is now). By 1980, the ratio was 30%, which is entirely manageable.

Of course, nominal debt and GDP soared, but nominal GDP went up faster than nominal debt, so the ratio fell. If you can keep inflation around 3% and interest rates around 2% and exert fiscal discipline (which we did under Eisenhower, Kennedy, Nixon and Ford), the nominal GDP will grow faster than nominal debt (due to the Fed capping rates).

If you improve the ratio by, say, 2% per year and keep it up for 35 years (1945–1980), you can cut the ratio by 70%. That’s what we did.

The key was to do it slowly (like stealing from your mom’s purse). Almost no one noticed the decline in the real value of money until we got to the blow-off stage (1978–1981). But by then it was mission accomplished.

So there are two ways to deal with excessive debt: fiscal discipline and inflation. From 1945–1980, the U.S. did just that. If you run inflation at 3% and interest rates are 2%, you melt the real value of debt. If you exert fiscal discipline relative to GDP, you decrease the nominal debt-to-GDP ratio.

We did both.

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But… but… but… Orange man bad! Infrastructure! Climate change! Gender reassignment!

Democrats are crushing the country with debt. Oh, sure, Republicans have spent some, too, but it’s usually for the things the Democrats have been ignoring, like defense, even as they run up $15 trillion in debt. And, worse, accountability and oversight gets weaker and weaker. The latest Democrat spending boondoggles are nothing but methods to get trillions of dollars dumped into circulation with little or no oversight so it can be used to steal and buy votes.

It is simple math. The government cannot take in 5 trillion in revenue and then spend 7 trillion. It is not sustainable.

The deficit for this year is projected to reach 2.5 trillion. 8 trillion in current debt will need to be refinanced at higher interest rates. Higher interest payments will result in cuts in discretionary spending in order to move toward a balanced budget.

Regular order is needed in the House appropriations process. The House has not passed a budget since the late 1990’s.
Under the Budget control act of 1974, by law Congress must pass a budget and must complete 12 separate appropriations bills that make up the budget.

Skyrocketing debt is what happens when you keep cutting taxes, insisting that cuts magically “pay for themselves”.

Republicans have been pitching this irrational bullshit for three decades.

When we had a more aggressive progressive tax schedule, we didn’t have skyrocketing debt.

What we had was a lot fewer billionaires, and a prosperous and growing middle class.

Last edited 1 month ago by Greg

Skyrocketing debt is what happens when you keep cutting taxes, insisting that cuts magically “pay for themselves”.

No, that’s what happens when Democrats spend $5 trillion we don’t have. Taxes are too low? RAISE THEM! Don’t just keep spending as if money just appears at the end of a rainbow. RAISE THE F**KING TAXES, if you have the f**king guts. Stop pretending businesses and “the wealthy” are the problem; RAISE THE F**KING TAXES, you lying hypocrites.

SPENDING is the problem and no one spends more and WASTES more than Democrats, because Democrats have never had to work, never had jobs, never had responsibilities and just want to STEAL as much as they can get, and that’s easier when there are TRILLIONS of uncontrolled tax dollars being thrown everywhere.

By the way, the tax cuts DO pay for themselves, as long as Democrats don’t get the opportunity to waste trillions of dollars at the stroke of a pen.

I thought joe said biden omits was working. What happened?