One can't discuss the issue of excessive debt without being treated to this platitude:
"Sure, it may be bad in the US, but it's worse everywhere else."
This statement simply isn't borne out by the facts. There are many nations out there with far healthier levels of indebtedness than the US. In fact, out of the 172 countries whose federal government debt is measured by the IMF, the United States has higher debt as a proportion of GDP than all but 12 of them! And most of those countries aren't piling on further debt at a rate of 8% of GDP per year like the US.
Perhaps the "everywhere" isn't to be taken so literally, and the expression is meant to apply to the debt crisis-afflicted European Union. But even when you set the bar that low, the comparison doesn't hold up.
The following graph compares the IMF's 2011 estimates for the federal debt of the United States with that of the much-maligned "PIIGS" countries as well as the entire Euro Area as a whole:
With more debt than Spain and just barely less than Portugal and Ireland, the US fits right in with the PIIGs and is substantially more indebted than the overall Euro Area. Importantly, our public debt to GDP ratio of 100% is comfortably past the level at which economic growth typically starts to suffer as a result of the debt - an ominous sign that it will be much more difficult to "grow our way out of it" than many seem to expect.
When we look at how quickly the various countries are adding to the debt loads characterized in the prior graph, the US doesn't look so great, either. This is illustrated in the next graph, which shows the primary budget balance (the deficit before interest payments) for the same set of countries as above:
Note that the US has a negative budget balance that is worse than any of the individual PIIGS countries, and over 5 times the size of the overall Euro Area's negative balance.
The "it's worse everywhere else" crowd may also be referring to Japan, which admittedly has a much higher debt load than the United States as well as a larger budget deficit. But while the US is heavily dependent on foreign lending (47% of publicly owned US Treasuries are owned by foreigners), Japan is a nation of savers whose public debt is funded by its own citizens. Even still, we think that Japan is also at great risk for a debt implosion of its own… but that's a topic for another article.
As bad as the situation may be in the US right now, the path for our future debt accrual is truly disastrous. The present value of our "unfunded liabilities" - the difference between what our government has promised to pay out in the future, and what it expects to collect - is over $65 trillion, or around 450% of GDP. And according to the president himself, "by 2025, the amount of taxes we currently pay will only be enough to finance our health care programs, Social Security, and the interest we owe on our debt. That's it... Every other national priority -- education, transportation, even national security -- will have to be paid for with borrowed money."
For an in-depth look at the gravity of our debt situation, including an exploration of how unfunded future liabilities figure into the mix, please see this article that we wrote last year. We'll sum it up here by stating that our debt, deficit spending, and unfunded liabilities are already well past the point of sustainability, and are only growing worse.
Yet while the Eurozone is experiencing a government debt crisis, bonds of the debt-choked US government are considered a "safe haven." Why is this?
This question could be discussed at length, but the primary answer boils down to three words: the printing press. While the ECB has refused to create money in order to directly buy mass quantities of government debt (though they may have very recently begun to do so in an indirect way via the LTRO program), the US Federal Reserve has been regularly printing money in order to buy government debt since early 2009.
The thinking apparently goes that as long as you have a central bank that is willing to buy government debt with newly created money, there is no chance that the government will default on its debt. And that may be true on the face of it. But conjuring huge amounts of money out of thin air causes its own set of eventual negative consequences, the foremost of which is the potential for severe inflation.
For now, market participants are completely focused on Euro area default risk and are oblivious to the risks posed by rampant money creation among the "printing press countries" such as the US. But as we've seen so many times before, just because the market is ignoring a problem, that doesn't mean that problem has gone away. It just means that the market will concern itself with the problem at some point in the future, often suddenly and without warning.
So while the crisis in Europe may have given the US a reprieve, we think that at some point the focus will shift to our own intractable debt issues. We don't know what the catalyst will be - it could be higher inflation, a recession resulting in lower revenues, or just a general dawning in which misplaced confidence among market participants suddenly evaporates. But we do think a debt crisis is likely to hit our shores, and that the result will be some combination of serious problems in the currency market (a lower dollar, higher inflation) and in the Treasury bond market (lower bond prices, higher interest rates).
