Yesterday, during the Biden laughing show, which also occasionally panned right the GOP vice-presidential candidate, we showed what is arguably the one and only chart that should be discussed on each of these staged theatrical productions. The chart, which is presented below, shows that 40% of all US spending (and rising) is now funded through debt. In other words, the US is explicitly at the mercy of its creditors who while cooperating for now in a MAD game-theoretical tit-for-tat scenario, can very easily decide to just say no more, and cause a complete collapse of all Federal spending.
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The only backstop, of course, is if the Fed were to monetize all debt issuance, which as we have repeatedly shown, the Fed is already doing for all gross issuance in the 10+ year bucket. It is only a matter of time before the Fed is force to monetize each dollar as it exits the US Treasury, as more foreign entities join the China buyer strike, and instead of recycling petrodollars in US debt, continue to buy hard assets such as gold, as China has been doing for the past 18 months [9].
However, where it gets fun, and where the issue above intersects the most important event this year: namely the election of America's president, is when we look at what the government's own Office of Management and Budget forecasts will be US debt and interest. It goes without saying, that the chart shows just how even more unsustainable the currently unsustainable US situation is. Because if nothing changes in the trajectory of US spending, this country is due for a very painful readjustment, only instead of doing it on its own terms, it will have to be in the context of Greece, when it has to fight for a cash disbursement from some other multinational corporation every single day.
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This is how David Rosenberg, who defends biting the bullet, and letting the Fiscal cliff play out as at least it will force America out of its epic debt binge, lays it out:
There is never going to be a good time to put Washington on the debt treadmill. To be sure, it will imply a negative GDP growth rate in the first quarter of 2013, perhaps into the second quarter as well, but that would be it. The retrenchment would be more of a level adjustment, albeit downward, but not a multi-quarter persistent slide in economic activity. The private sector will re-build GDP from a lower base, and with the prospect hopefully of some meaningful tax reform and the removal of clouds of fiscal uncertainty, we could readily climb out on the other side of that cliff. It's not as bad as everyone fears... we will get to the other side, and with fiscal finances in much better shape. That is the silver lining in the cloud.
As I said- there is no good time, but better now than waiting to be shocked into the retrenchment later on. If left unchecked, the Federal debt/GDP ratio will breach 100% within the next two or three years. Do we really need to turn European? And more importantly, even under a sustained low interest rate policy, debt service costs will continue to bite into the revenue base - so much so that they will soon begin to absorb more than 20% of total tax receipts. At a time when grim demographic realities will push dependency ratios higher and with that ever-spiralling entitlement spending, the power of compound interest on a continued mountain of debt even assuming years of low rates will ensnare fiscal finances and seriously limit our policy flexibility in the future.
Well said. And sadly, one big pipe dream. Because if there is one thing one can be certain is that no developed country will ever again do the right fiscal thing, as it means a complete political overhaul once the people realize they had been lied to for decades, and all those promises they have been swamped with in years past by this candidate and that, are just not coming true. The reason: the money has run out.
And yes, the correction will come, but only after everyone has lost control of the big picture. When the correction finally does come, it will be that much more painful, and that much more akin to the catastrophic event that really ended the first Great Depression.
Because Mark Twain was right all along about the whole history rhyming thing.