Exploding Debt Threatens America

Veronique de Rugy reports on the gathering economic threat and provides some excellent analysis:

Over at the Financial Times, Stanford University's John Taylor worries about our debt.

Under President Barack Obama's budget plan, the federal debt is exploding. To be precise, it is rising – and will continue to rise – much faster than gross domestic product, a measure of America's ability to service it. The federal debt was equivalent to 41 per cent of GDP at the end of 2008; the Congressional Budget Office projects it will increase to 82 per cent of GDP in 10 years. With no change in policy, it could hit 100 per cent of GDP in just another five years.

A government debt burden of that [100 per cent] level, if sustained, would in Standard & Poor's view be incompatible with a triple A rating," as the risk rating agency stated last week.

Massive tax increases (60 percent across the board) or inflation (100 percent) would help balance the budget. In other words, it's not good.

And 100 per cent inflation would, of course, mean a 100 per cent depreciation of the dollar. Americans would have to pay $2.80 for a euro; the Japanese could buy a dollar for Y50; and gold would be $2,000 per ounce. This is not a forecast, because policy can change; rather it is an indication of how much systemic risk the government is now creating.

He rightfully concludes that now is the time to do something, but that government is not the solution as it is the biggest source of systemic risk in the system. He thinks the good news is that it's not too late. And that's where I start to worry. Time is only useful when there is someone in Washington interested in tackling our debt problem. Yet, I don't see that such a person exists. As Instapundit's Glenn Reynolds reported recently, the Obama administration's policy boils down to acknowledging that we are out of money, but that it's not its fault (which it's not entirely or wasn't at first) and then use this fact that we are broke to push even more spending.

Sounds to me like Obama has no legitimate ideas about how to fix the root problem (or doesn't want to), and is much more interested in achieving his own personal goals, anyway.  Draw your own conclusions on how you think Obama's plan is working so far.

Ace of Spades has a bit more explanation:

Inflation will do it. But how much? To bring the debt-to-GDP ratio down to the same level as at the end of 2008 would take a doubling of prices. That 100 per cent increase would make nominal GDP twice as high and thus cut the debt-to-GDP ratio in half, back to 41 from 82 per cent. A 100 per cent increase in the price level means about 10 per cent inflation for 10 years. But it would not be that smooth - probably more like the great inflation of the late 1960s and 1970s with boom followed by bust and recession every three or four years, and a successively higher inflation rate after each recession.

Not exactly a rosy future, huh?  I seem to recall reporting predictions of another Carter-like meltdown long before the election...

Anyway, here's the accompanying analysis:

The economy is driven partly by psychology. In the current situation, people have gotten over their initial "oh my God we're going to lose everything" panic, and they are now into their "This feels about the right length for a recession; things should be getting better now" phase.

Psychology usually creates a self-fulfilling prophecy. Economies improve partly because people expect them to.

But.

People expect the economy to improve because in the past it historically has after a year or so. The problem is that, in this case, the government has been doing what it historically hasn't previously done before -- it's pursuing decidedly anti-growth and anti-recovery policies.

The economy will most likely improve a bit, largely due to psychology. But people will expect a positive feedback -- they'll expect greater improvements, thus affirming their initial notion that the economy was due to mend.

But those expected additional improvements will not come, because Obama and the Democrats have been pursuing policies well-nigh expressly designed to sabotage the chance of such improvements.

And thus, people's nascent hopes having been dashed, they'll fall into a fresh funk of pessimism and futility, and a new recession will begin.

That's what happened with the Great Depression, and that's what happened with Japan's 'lost decade'.  In both cases, the government tried to dump money into the economy to jump start it, and that only prolonged the pain.  Obama, on the other hand, firmly believes that the failing of FDR was that he didn't dump enough money in.  That's why he's going so far beyond the bounds of 'reasonableness' with his multi-trillion dollar spending in a matter of weeks (remember, he has spent more taxpayer money in three months than all 43 previous Presidents combined throughout 230+ years).

Bottom line: there is not enough money to do everything Obama promised, but he's going to have to come up with it somehow.  Thus, one of two scenarios is all but assured:
1. massive inflation
2. tax increases

Obviously, both would have a huge negative effect on your daily life.  Knowing how Obama and his policies generally work out, I'm guessing we'll end up with both.

I'll post more on these scenarios in separate posts; this has gotten long enough.  Just keep your eyes and ears open, and pay attention to what Obama and Congress are doing.  You will feel it.

There's my two cents.