Two Minus One Equals Three

On today’s show we are talking about the most insane statements to come from economists in recent memory.  I’m acutely aware as I’m sure many of our listeners are, of the unsustainable levels of government debt in the US, Canada, the UK, France, Switzerland, Italy. I could go on.  The justification for the debt is that as long as the interest rates are lower than the level of real economic growth, that is growth of real GDP, the debt is sustainable.  But folks here is where the argument falls apart. We know that our population is aging. That’s not a secret. We also know that as people age, their spending patterns change. They spend less. They also borrow less. So the argument that economic growth will continue at the same 2.1% rate in the coming years in the western economies makes no sense.  We saw in Japan that economic activity stagnated as soon as the working population peaked as a result of the aging process. Japan’s lost decade happened as soon as the domestic spending shrank. In other countries in the west We have a population that as it retires switches from actively contributing to economic output to one that is strictly consuming from society. They spend less. They pay less in taxes. They demand more from the society in terms of social security and health care.  The deficit spending at the federal level gets the most attention. But the federal government has the tool to print money at will and inflate its way out of the problem by effectively devaluing the currency. That’s a way of taxing the population without them really noticing.    The government racked up a new debt of $2750 for every man, woman and child in America this year. That comes to $7,100 per household. That’s in addition to the already existing debt of 22T dollars. That debt comes to $67,000 for every man woman and child in the country, or a total of $173,000 per household.  Nobody seems to be talking about this. This is a train wreck in the making. Here’s what my friend Peter Schiff had to say about the 22T in debt. He says,  "This is just a funded portion of the debt. This is where the US government sells a bond and somebody owns that bond. It doesn't include the 70T in unfunded liabilities like what the government owes for Social Security, or guaranteed bank deposits, or mortgages, or student loans, or all that nonsense. That's not there. Those are contingent liabilities. They're just as real. They're not even part of the national debt calculation." I may not be an economist, but I can perform pretty basic arithmetic. The economy will not grow faster than interest rates. A country will never grow its way out of a deficit. Remember, interest rates reflect a connection to the rate of inflation and also carry a risk premium. When countries carry irresponsible levels of debt, the risk of default clearly goes up. It’s not the Federal reserve who will establish the risk premium, it’s the open market. When China decides it no longer wants to hold 25% of the global float of US treasury bills, who will step in to buy them? When Saudi Arabia decides it no longer wants to hold dollars so much, who will step in to buy them? We see countries in South America with much higher interest rates than the US. Why? Because they’re at higher risk of default. When investor sentiment shifts and global investors don’t want to hold US dollars any more, then the US dollar will carry a risk premium, the same as Argentina.