SOVEREIGN ALCHEMY WILL FAIL

As the Austrian economist von Mises said: “There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency involved.”


http://matterhornassetmanagement.com/2010/02/11/sovereign-alchemy-will-fail/


The problem is not just the current debt levels of these nations, because the deficits in all the countries are rising. Tax revenues are collapsing and with rapidly rising unemployment, the governments’ expenses for social charges are soaring.

In the US for example the federal deficit in 2009 was $1.5 trillion (10.7% of GDP) and is forecast to stay around that level for many years. The plight of the US states is just as bad. Out of 50 states only 4 are expected to have a balanced budget in 2010. Up to 40 states, including California, New York, Florida, Illinois, Michigan, Ohio, North Carolina and New Jersey, are virtually bankrupt.

It took almost 200 years for US Federal debt to reach $ 1 trillion which it did in 1981. In 2009 the debt increased by $ 1.9 trillion in just that year to $ 12.4 trillion. In the next ten years the US debt is forecast to reach $ 25 trillion. And this doubling of the debt does not include any funds to prop up a bankrupt financial system or the spending of tens or maybe hundreds of trillions of dollars on worthless OTC derivatives.

The forecast also assumes growth in GDP which is extremely unlikely especially for the next 2-5 years. Currently US Federal debt is six times what it collects in tax revenue every year. With debt exploding and tax revenues collapsing, there is no chance that the debt can ever be repaid with normal money. Also, with debt out of control interest rates will rise substantially to 10-20% per annum. Applying a 15% interest rate to a $ 25 trillion debt would give an annual interest bill of $ 3.75 trillion which would be substantially more than tax revenues.

The chart below shows the US Federal Debt per person. In the last ten years it has gone from $ 20,000 to $ 40,000. Total US debt, including private and corporate debt as well as unfunded liabilities, comes to $430,000 per individual. It is an absolute certainty that every man, woman and child in the US cannot pay off almost half a million dollars with normal money. Only massive money printing will take care of that.