"...National governments will issue an estimated $4.5 trillion in debt this year, almost triple the average for mature economies over the preceding five years. The U.S. has allowed the total federal debt (including debt held by government agencies, like the Social Security fund) to balloon by 50% since 2006 to $12.3 trillion. The pain of repayment is not yet being felt, because interest rates are so low--close to 0% on short-term Treasury bills. Someday those rates are going to rise. Then the taxpayer will have the devil to pay.
Whether or not you believe the spending spree was morally justified, you have to be concerned about the prospect of a dismal, debt-burdened fiscal future. More debt weighs heavily on GDP, says Carmen Reinhart, a University of Maryland economist. The coauthor, with Harvard professor Kenneth Rogoff, of This Time It's Different: Eight Centuries of Financial Folly (Princeton, 2009), Reinhart has found that a 90% ratio of government debt to GDP is a tipping point in economic growth. Beyond that, developed economies have growth rates two percentage points lower, on average, than economies that have not yet crossed the line. (The danger point is lower in emerging markets.) "It's not a linear process," she says. "You increase it over and beyond a high threshold, and boom!" The U.S. government-debt-to-GDP ratio is 84%...
If the GDP doesn't expand at "normal" rates of 3% to 5% coming out of this recession, wrestling down the debt will be very tough, indeed--perhaps impossible without drastic cuts in spending and higher tax rates on many fronts. The Congressional Budget Office currently projects the fiscal deficit will decline from 10% of GDP next year to around 4.4% from 2013 to 2015. But that assumes economic expansion of at least 4%, not the 2% predicted in the study by Reinhart and Rogoff. You see the vicious cycle here: Debt depresses growth, and then low growth makes paying down the debt an impossible task.
U.S. corporate income tax receipts were down 55% in the year ended Sept. 30, 2009 to $138 billion. It may be a long while before these tax collections get back to where they were. As corporate profits recover, factory utilization will be up and inflation will be close behind. At that point the 0% yield on Treasury bills will be history. Rolling over the national debt will become a lot more expensive. Higher rates on Treasuries will work their way through the debt market, driving up the cost of money for homeowners, businesses and already struggling state and local governments.
"The economy over the last six months has been on a sugar high," says Benn Steil, senior fellow at the Council on Foreign Relations and author of Money, Markets and Sovereignty (Yale, 2009), a survey of the relationship between money and the state. If Congress and the Obama Administration don't trim deficits, he says, "we will get to the point where credit is much more expensive in the U.S. than it ever has been in the past."
Most states are already having trouble paying their bills and, of course, don't have printing presses with which to finance their debts. They are turning to Washington for help and may succeed in putting some of their liabilities on the federal balance sheet. With growing off-balance-sheet obligations, notably unfunded pension liabilities (see graphic in "Debt Weight Scorecore"), the states will be competing for years with the federal government for scarce taxpayer dollars.
"U.S. states are like emerging markets," says Reinhart. "They spend a lot during the boom years and then are forced to retrench during the down years." Cutting expenses sounds good theoretically, but look at California: Students (and faculty) are up in arms over proposed tuition increases and cutbacks at the state's once prestigious university system; state employees are mounting a fierce legal battle against furloughs and other wage concessions..."
at http://www.forbes.com/forbes/2010/0208/debt-recession-worldwide-finances-global-debt-bomb.html?boxes=financechannelmostemailed
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