Public debt will be the downfall of the global economy. Greece is the poster child, but it is well known that others are close to default, and some commentators have suggested the U.S. could wind up like Greece.
The problem is of course that debt was taken on with certain assumptions made about growth, and even now there are assumptions being made that don't reflect the actual state of the global economy. Take for example the great recent numbers for automobile sales, a nice healthy increase from the apocalypse of a year ago but the current pace is still for about 11 million units a year, pre crisis we were running at 16 million units a year. We have growth now, but it is growth from the abyss, that is not a hard thing to accomplish.
Not to mention that so much of that growth is from public spending.
The downward spiral will be hard to stop when the bottom falls out of public spending, which it must. Just for the sake of repeating, one third of the federal governments spending was debt driven this year. One third.
This is beyond a simple concern for the value of the dollar, this is about the sustainability of the model. Governments cannot keep loading on debt, at some point all those bonds become worthless. Without healthy growth they will be worthless, without debt spending there will be no growth.
So one might say that this is only a problem for the countries who have piled on the debt. No not really, it is a problem for those who have piled up the dollars because the dollars are only as good as the solvency of the U.S. And that is suspect.
It isn't a simple matter of inflating out of debt either. The powers that be have everything they can to ignite some form of inflation for over a year. When the economy stinks demand slows, and without demand there is no inflation, all that is happening is cash hoarding, by banks and by consumers.
Public debt is all that has been propping up mutiple economies in the world, the debt has been accrued at levels that require higher groth than is possible to pay it back. When the faultiness of this equation becomes clear, a lot more will unravel.
This is compounded by the difficulty in trying to roll back the cost of government. Now that Greece is trying out an austerity program public employees are rioting. This scene will be often repeated.
You hear the opinion put forward that the E.U. shouldn't have to bail out "the rich Greeks" and that the main culprit of the problem is their tax system. Yet when the anarchists rioted in Greece they were blaming the U.S. claiming that the U.S. engineered Greece's problems because they wanted a strong dollar and a weak Euro courtesy of Greece was the best way to get it. Lovely theory, screwball as it may be, still why isn't a group as radical as anarchists finding blame to put on the wealthy? O.k. so they are against governments, it's really a libertarian thing, but no cabal of the rich? Given the mistrust of the government in this country one might expect an even more weird response, somehow we see the wealthy as better than the government because, by God, they know how to manage their money. This is why we always have such a fascination with the wealthy serving as politicians. Never mind that they got that way not only from a good dose of ability but also through the assistance of the government via tax policy etc.
According to the CBO by 2020 GDP in the U.S will be 22.7 trillion dollars, debt service will have reached 723 billion, and the deficit will be 684 billion. Those two numbers, debt service and annual deficit will be 6% of GDP. Now the kicker is that real, real mind you, growth has to exceed 6% for this scenario to work at all, or else you're going broke, and sending standards of living down the river. We are already in this position, although because of various extra costs, wars, stimulus, bail outs, it is hard to gauge what is happening at the other end of this tunnel, still the idea that real growth will exceed inflation, debt service, and structural deficits is absurd. That is the problem that is going to eat the global economy alive.
Governments have driven fiat into the ground. They are making cash look more like worthless currency every day. If you can't honor your debts, then the paper is indeed worthless. In the case of the U.S. the ability to run up debt and then print the money to pay for it is a very troublesome combination.