Monday, December 21, 2009
"A Trillion Troubles Ahead"
by Bert Dohmen
"Not too long ago, a billion dollars in a governmental budget was a lot of money. Then we got into hundreds of billions. People understood that this was a lot, just because of all the zeros. Now, unfortunately, the number has become small: the world "trillion," as in $1.2 trillion for health care reform, seems so tiny. But it has 12 zeroes behind it, which is so easy to forget.
What is a "trillion?" According to the Web site www.100777.com, if you laid 1 dollar bills end to end, you could make a chain that stretches from Earth to the moon and back again 200 times before you ran out of dollar bills! One trillion dollars would stretch nearly from the Earth to the sun. It would take a military jet flying at the speed of sound, reeling out a roll of dollar bills behind it, 14 years before it reeled out 1 trillion dollar bills.
If the government stays on the course it's been on for the past forty years without a radical change, the federal government will soon have a $10 trillion budget. In other words, the federal budget deficit will be $1.4 trillion. Just to make the size more visible, that's $1,400 billion.
Our colleague Rob Arnott, who always does terrific research, wrote in his recent report that "at all levels, federal, state, local and GSEs, the total public debt is now at 141% of GDP. That puts the United States in some elite company- only Japan, Lebanon and Zimbabwe are higher. That's only the start. Add household debt (highest in the world at 99% of GDP) and corporate debt (highest in the world at 317% of GDP, not even counting off-balance-sheet swaps and derivatives) and our total debt is 557% of GDP. Less than three years ago our total indebtedness crossed 500% of GDP for the first time." Add the unfunded portion of entitlement programs and we're at 840% of GDP.
The world has not seen such debt levels in modern history. This debt is not serviceable. Imagine that total debt is 557% of GDP, without considering entitlements. The interest on the debt will consume all the tax revenues of the country in the not-too-distant future. Then there will be no way out but to create more debt in order to finance the old debt.
It assures a period of economic devastation. In a last, desperate attempt, politicians at the federal and local levels will raise taxes to astronomical heights to raise revenues. And that only assures destruction of the economy. Forget the fable of economic recovery. Unless there is a change in Washington by next year's election, there will be no way to turn back.
Japan's recession is now 19 years old. It has the highest debt-to-GDP level (227%) of any industrialized country. The Fitch rating agency is talking about a potential downgrade of Japan's debt. Japan's stock market is still down 75% from the high in 1990. We predict it will make new bear market lows next year. That will make it a 20-year-long bull market on the way to 25 years. The bulls in the U.S. should consider that possibility in the formerly great United States of America. I do not believe the bullish theory that the U.S. situation is different than Japan's. Ours is so much worse. Is it any wonder that our biggest creditors, China, Russia and the Middle East, are diversifying out of the dollar and into gold?"
- Bert Dohmen,
Editor of "Bert Dohmen's Wellington Letter" and founder of Dohmen Capital Research Institute.