The Debt Problem

We are all aware of the debt problem that we have in the United States. The debt is currently over 16.2 trillion dollars and increasing. This represents a debt of approximately $51,600 per citizen and $141,700 per taxpayer. The debt represents a major problem with no easy solutions.

The debt and deficit can be compared to a leak in a boat. The faster the water comes in (deficit) the more total water (debt) the ship holds. At some point that ship will not be able to take on any more water and will sink. Hopefully if we bail fast enough (increase taxes and/or reduce spending), it won’t sink. But at this point, it may be inevitable without taking drastic measures. When the ship we call the United States sinks, all of the other ships will feel the waves like never before.

I believe it is probable that our government will “print” money to alleviate the problem. I also beleive that at some point, our government will have to balance the budget. If we were to balance the budget today we would remove 1.1 trillion in spending from the world economy in which the bulk of this spending occurs in the United States. I don’t believe our economy could take such a hit without going into another recession. If our government balances the budget slowly, we will end up with even greater debt to GDP ratios and will be faced with even greater deficit reduction down the road.

This leaves the inflation option.

The Fisher Hypothesis tells us that all things being equal, a rise in a country’s expected inflation rate will eventually cause an equal rise in the interest rate.

Current lenders now face the risk of rising inflation. If inflation does rise and increased interest rates follow, this represents a significant risk of loss to lenders represented by discounts in debt securities. This, in turn, produces the risk of decreased asset values and recession.

Any way I spin the issue; it always ends up in recession. Any arguement to the contrary would be appreciated so I could sleep a little more easy tonight.

Debt timebomb