While last fall’s soap opera on increasing the official U.S. debt ceiling still lingers in investors’ minds, last Thursday, President Obama put in his formal request to Congress to raise the U.S. debt ceiling limit by another $1.2 trillion. Congress has 15 days to vote on the request. This would raise the U.S. debt ceiling from the current $15.194 trillion to $16.394 trillion.
(Legislation calls for the President to place his formal request with Congress when the U.S. debt ceiling limit comes within $100 billion of being breached.)
Let’s keep in mind that, although the final figures have yet to be released, U.S. GDP for 2011 will be in the area of $15.0 trillion, less than the current U.S. debt ceiling. This means that the national debt has reached 100% of what our country produces (GDP).
It’s funny how numbers like this are not shocking people. Nothing to worry about; the U.S. debt ceiling keeps increasing each passing year, our national debt now equals our GDP, but everything is fine? In my opinion, the proverbial alarm bell should be ringing when a country’s debt-to-GDP level hits 100%.
We in America are fortunate that, in spite of the ever-increasing U.S. debt ceiling, this land is still perceived as the safe harbor of the world to park one’s money—in U.S. Treasuries—during these uncertain times. Because of this “safe harbor” mentality, the interest rates the U.S. government is paying on its debt are at historically low levels, from almost zero on short-term interest rates to under two percent for longer-term rates.
If rapid inflation rears its ugly head—as I expect it to—then interest rates will move higher, which obviously means that the cost of servicing the country’s debt (the interest payments on the debt) increases…possibly by hundreds of billions! Increases in the U.S. debt ceiling will have to come faster if inflation and higher interests prevail.
And we’re already at 100% of GDP!
The estimated U.S. budget deficit for fiscal 2011 was $1.3 trillion. The Office of Management and Budget is forecasting that, in its current fiscal year, the U.S. budget deficit will reach $956 billion. Let’s put aside the fact that, most of the time, these projections are wrong (that’s why they call them “projections”). Let’s also put aside that this estimate is based on the U.S. economy growing by 2.6% in 2012 and the unemployment rate remaining steady (good luck with that).
Please follow me for a moment…
If we take the $15.194 trillion in current U.S. debt and add $956 billion (the official current year’s U.S. budget deficit estimate), we get a total national debt of $16.15 trillion, which means that the current U.S. debt ceiling request will last roughly until the end of the government’s current fiscal year (September 30, 2012), and will easily pass 105% of GDP.
In 2013, the White House is hoping that the U.S. budget deficit will continue to fall from its $956-billion projection for 2012. This, however, is based on continued growth in GDP and interest rates remaining at historically low levels! What about inflation? Forget that…it was a 1980s issue, right?
Dear reader, please don’t forget that Greece’s problems began when its debt reached 130% of GDP. By my estimates, if government spending isn’t cut or taxes are not raised, the U.S. will hit a national debt equal to 130% of GDP in 2015—that’s three years from now…three consistent years of raising the U.S. debt ceiling!
That’s only if nothing goes wrong: no natural catastrophes, no new wars, no spike in inflation, and no spike in interest rates…things we all know can happen very quickly. And I didn’t even mention a worldwide slowdown in economic activity (see: Economic Slowdown for 2012 Will Be Worldwide).
If someone were to ask me today where I see the next bubble, I would say the bubble is in U.S. Treasuries. We keep increasing the U.S. debt ceiling and we are racing to the same debt/GDP ratio many eurozone countries hit before they faced a debt crisis. The writing is on the wall.