Warning signs are all over ... but no-one is reading them.. Is it complacency ? Is it speculation ? Is it a false hope that somehow someone somewhere will bail out ...
Is it Greece ? No way.. Greece just needs $147 billion for a bailout. US can print that money in an hour ..
Is it Spain ? How about the Italians ? Will they be the ones who will eventually cause the contagion that will bring the world economy down ..
The biggest one is still out there. Moody's has just issued a warning that US credit rating may be downgraded. In my opinion the US debt rating should have already been downgraded..
US Debt to GDP Ratio is around 98%.
Federal Revenue:GDP ratio is around 30% and Federal Spending:GDP Ratio is 45%+ which means that every year the government continues to spend 50% more than it earns. Unless there are deep cuts in federal spending the debt burden is going to grow and grow and grow and grow..
The current US Debt Ceiling is about 14.3 trillion, and as per the Debt clock below, that limit is already reached. In simple words Uncle Sam has already borrowed to the maximum allowed limit. The congress has to agree till Aug 2, 2011 to raise the debt limit.
Under pressure from the rating agencies the congress will squabble and eventually agree to increase the Debt ceiling. Once that decision is reached and the market will temporarily rejoice. Time to sell..
However US debt is still attractive for foreign governments, most notable amongst them the Chinese, who depend on a strong dollar to sustain their trade with US. China is still growing at 9%+ and European debt is far worse than their US counterparts.
As per this article: "bought $38 billion in U.S. government debt in May(2011), increasing their holdings 0.6 percent to $4.51 trillion"
Chinese growth story and "There is no Alternative" factor may still sustain the US debt for some more time.. How long ???
Eventually the economic fundamentals have to catch up. Sooner or later the world appetite for consuming US debt is going to reduce, especially if US keeps spending at the current rate.
To reduce the deficit the US government will eventually have to increase taxes and reduce spending. Tax rates are already quite high and increasing them further will only lead to a further slowdown in an economic recovery that is growing more because of availability of cheap credit rather than an improvement in the fundamentals. Reducing spending is the most practical and sustainable alternative. Unless US reduces it's spending significantly we are slowly and certainly looking for a major crash of confidence, crash of dollar and a prolonged economic recession..
However any US president in his first term in office would want to get elected for the second term and prefer to take populist decisions to keep funding wasteful expenditures like excessive medicare, social security benefits to the undeserving unemployed, and wars that are not needed.. Bush-Greenspan brought down the interest rates to near 0% and fueled the "sub prime" crisis by encouraging unqualified borrowers to buy overpriced houses with "zero down". I doubt if Obama can cut down spending for his core constituency.
Bottomline is that US debt ceiling will eventually be increased. The bubble and the monster of US deficit will become bigger and bigger. The more inflated the bubble the bigger the burst. Till such time the world considers US "Too big to Fail" and gobbles up US debt.. we can live in the illusion of growth and safety..
When the bubble bursts.. as it must ... many will remember God
The great Crash is coming... Are we prepared for it ?
Is it Greece ? No way.. Greece just needs $147 billion for a bailout. US can print that money in an hour ..
Is it Spain ? How about the Italians ? Will they be the ones who will eventually cause the contagion that will bring the world economy down ..
The biggest one is still out there. Moody's has just issued a warning that US credit rating may be downgraded. In my opinion the US debt rating should have already been downgraded..
US Debt to GDP Ratio is around 98%.
Federal Revenue:GDP ratio is around 30% and Federal Spending:GDP Ratio is 45%+ which means that every year the government continues to spend 50% more than it earns. Unless there are deep cuts in federal spending the debt burden is going to grow and grow and grow and grow..
The current US Debt Ceiling is about 14.3 trillion, and as per the Debt clock below, that limit is already reached. In simple words Uncle Sam has already borrowed to the maximum allowed limit. The congress has to agree till Aug 2, 2011 to raise the debt limit.
Under pressure from the rating agencies the congress will squabble and eventually agree to increase the Debt ceiling. Once that decision is reached and the market will temporarily rejoice. Time to sell..
However US debt is still attractive for foreign governments, most notable amongst them the Chinese, who depend on a strong dollar to sustain their trade with US. China is still growing at 9%+ and European debt is far worse than their US counterparts.
As per this article: "bought $38 billion in U.S. government debt in May(2011), increasing their holdings 0.6 percent to $4.51 trillion"
Chinese growth story and "There is no Alternative" factor may still sustain the US debt for some more time.. How long ???
Eventually the economic fundamentals have to catch up. Sooner or later the world appetite for consuming US debt is going to reduce, especially if US keeps spending at the current rate.
To reduce the deficit the US government will eventually have to increase taxes and reduce spending. Tax rates are already quite high and increasing them further will only lead to a further slowdown in an economic recovery that is growing more because of availability of cheap credit rather than an improvement in the fundamentals. Reducing spending is the most practical and sustainable alternative. Unless US reduces it's spending significantly we are slowly and certainly looking for a major crash of confidence, crash of dollar and a prolonged economic recession..
However any US president in his first term in office would want to get elected for the second term and prefer to take populist decisions to keep funding wasteful expenditures like excessive medicare, social security benefits to the undeserving unemployed, and wars that are not needed.. Bush-Greenspan brought down the interest rates to near 0% and fueled the "sub prime" crisis by encouraging unqualified borrowers to buy overpriced houses with "zero down". I doubt if Obama can cut down spending for his core constituency.
Bottomline is that US debt ceiling will eventually be increased. The bubble and the monster of US deficit will become bigger and bigger. The more inflated the bubble the bigger the burst. Till such time the world considers US "Too big to Fail" and gobbles up US debt.. we can live in the illusion of growth and safety..
When the bubble bursts.. as it must ... many will remember God
The great Crash is coming... Are we prepared for it ?
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