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The Time Bomb of Global Government Debt and Deficits Is Ticking Louder

Posted by Larry Doyle on June 23, 2010 12:35 PM |

Living beyond one’s means is a path to long term pain. That path is not in front of us, but rather is upon our nation and many others around the world.

The cost of funding the global government debt and deficits will continue to serve as a drag on our economic future. While financial wizards may believe the debts can be postponed, the simple fact is in the midst of a sluggish economy, global governments will not generate sufficient tax revenues to fund spending programs and the deficits. What does this mean? Lessened spending, increased taxes, and assorted other measures of fiscal austerity.

The Financial Times provides a fabulous review on this topic today in writing, Public Finances: Daunted by Deficits: >>>

Advanced economies entered the financial crisis in 2007 with an average budget deficit of 1.1 per cent of national income. By this year the figure had risen to 8.4 per cent as tax revenues plummeted and humbled banks were bailed out. General government gross debt is set to rise from close to 73 per cent of national income in advanced economies in 2007 to more than 110 per cent by 2015, according to the International Monetary Fund.

Dominique Strauss-Kahn, IMF managing director, says this global rise in public debt requires countries to aim at rapidly reducing borrowing so debt ratios can begin to fall – something he warns will require a sizeable and “sometimes unprecedented” effort. There is little alternative, he adds, as “failing to do so would ultimately weaken the world’s long-term growth prospects”.

Policymakers appear to have got the message. Across the world – from the US to Greece – plans are under way to cut spending and raise taxes. The UK on Tuesday became the latest country to join in the cutting crew. It follows Germany, Spain, Italy and Portugal, which in recent weeks have all also unveiled austerity budgets.

Some differences are already apparent. Advanced economies are initially planning to rely more on spending cuts; emerging countries have plumped more heavily for tax increases. No one is sure what the combined effect of this will be on global growth, but there is sufficient concern about the consequences that the US has put it on the agenda for this week’s meeting of the Group of 20 leading economies.

Add it all up and the simple fact is our domestic economy and the global economy are in for real challenges. Robust recovery? I don’t think so. The following pictorials paint a very ugly picture for what lies ahead. I direct you to the pictograph in the lower right which projects that the U.S. Gross Debt as % of GDP will approach 110% in 2015.

We can not live like that. We will be strangled by our debt service. Compare that figure to the debt to GDP percentage run by Iceland and Greece. “Ruh roh, Reorge!!”

Will America wake up and understand that the ticking time bomb representing our national debt is getting louder and louder?Does Washington have any appreciation for this?

LD

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  • Always Learning

    LD –

    The classic “ruh roh” from our favorite dog Astro on the Jetsons:

  • Mike

    So this is it.

    Austerity Cometh. Poor peter orzag. I can only imagine how many different groups were tugging at his collar for favorable funding on what will have to be a hugely reduced spending agenda next year. Probably got threats too. Not surprised he left. McChrystal resigning too, it’s an Obama mutiny starting to take place… Everything is all so unsustainable and these two have realized it.

    Seeing as Obama cannot heavily tax the rich (cuz they’re smarter than him and OWN him) naturally the pain will continue to move down to the next easiest target the MIDDLE CLASS. But not the lower class because that’s where his votes would come from… I hate politics. By the end of this decade you will either be a slum dweller living on gov’t cheese, or filthy rich.

  • fred

    LD,

    As you know, the only way you can address global deficits is to reduce gov’t spending including debt service. It’s that simple.

    As for the US, the answer is the same.

    Beyond the current financial crisis in the US, the structural “balanced budget busters” are social security and medicare.

    The solution to Social Security retirement benefits is easy, everyone can pay the same % of income into SSI on every dollar earned with no cap; the cap on payments would be eliminated while the cap on benefits retained.

    Natural population growth is a long term “known” so immigration policy would have to be managed on an actuarial basis to provide the necessary funding for a 2 generational planning horizon (50 years). All reserves to be held to matching duration in US treasury bonds, bills and notes.

    The solution to medicare will have to wait for another day!

    • fred

      Ah hell, why wait. No one wants to talk about it but the biggest chunck of our health care dollar is being spent to treat people “near death”. The decision to “treat” being made by health care proxies including drs, nurses and relatives with no skin in the game (personal money at stake)and unwilling, due to ethical standards of care or “thou shalt not kill” morality, to pull the plug on treatment even when “quality of life” and “death with dignity” are no longer an option.

      Unless the prognosis is for a reasonably long and happy life, treat the pain, make peace with your neighbor, say your goodbyes and may God bless.

      • LD

        Fred,

        I appreciate your inspiration on both these points. Trying to handle these fiscal fiascos is a political nightmare.






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