We are watching the Greek debt crisis play out in the press from half way around the globe and most view it as a European problem. That may be today but rising debt all around the world, much of it a product from massive stimulus, is a serious national security problem.
We saw the U.S. subprime problem ripple around the world to literally take tens of trillions of dollars out of the various markets either by losses, writedowns, market drops, property valuations and currency fluctuations. We have seen interest rates for sovereign debt climb into the high single digits and at levels that are practically unsupportable if they rise any further.
I have warned continually that eventually we will have a failed bond auction in the USA and our triple A debt rating would be in danger. This week we saw an auction failure in Lithuania. Granted they are not a big country but the problems are the same. They auctioned $500 million in bonds and only received bids for $300 million. This is the camels nose peeking under the edge of the tent. It is a symptom of things to come from the larger nations.
Fears of default by Eurozone PIGS are rising. (PIGS is the derogatory acronym given the four countries in southern Europe because of their economic problems, "P"ortugal, "I"taly, "G"reece and "S"pain.) The signs of contagion are spreading and the Euro continues to fall on fears of a fracture of the Eurozone participants.
The problem is not limited to the sovereign debt. Greece is not expected to be bailed out but they are also not expected to default. What is expected is a period of severe austerity for the Greek economy as the government tries to bring their debt back inline with Eurozone limits. The zone requires no more than a 3% debt to GDP and Greece is currently running a 13% debt to GDP and growing.
A period of severe austerity means limited government services, higher taxes, reduced or zero stimulus and general economic lockdown. In this environment consumer habits would decline significantly into hoard mode and businesses would fail by the thousands.
The ECB endorsed Greek's debt plan on Wednesday but they really had no choice. They either endorse it or cough up money for a bailout and they have repeatedly said there would be no bailout. The Greek problem is spreading to southern Europe, parts of Asia and even to the U.K.
In the past Paul Volcker, Chairman of the Fed under Jimmy Carter, warned repeatedly that rising public debt was a national security problem. He said a world power with a high debt to GDP would not be a world power very long. In the last 800 years no nation has survived intact after seeing their debt go over 10% of GDP.
With the current budget projecting a $1.6 trillion deficit in 2011, declining slightly in 2012-2014 then rising again into 2012, there is no way our debt will not exceed $20 trillion by 2020. At this level the debt service will rival the amount spent on defense and in order to remain solvent the U.S. will be forced to implement an austerity program of its own that will not be agreeable to its citizens.
Our national security is at risk because we are depending on other countries around the world, primarily China, to fund our debt. This gives them extreme amounts of leverage to use against us in future years. They already own enough of our debt to force us into a default, to force us into massively higher interest rates and by doing so prevent other countries from buying our debt.
The only way out of this problem is to cut spending but you can't do that and continue to inject cash into the economy in order to force feed the recovery. Something has to give and we are running out of options.
The one option nobody wants to discuss is to let inflation loose. By inflating the economy it lowers the value of the dollar and allows the government to buy back debt with cheaper dollars while wreaking havoc among the consumers. Remember 21% interest rates back in the early 1980?
The austerity program that will eventually be forced on to the Eurozone, Asia and the U.S. will eventually lower demand for oil products as commerce grinds to a halt. This is still a couple years away but without a sudden revitalization of the U.S. economy to produce a substantial amount of surplus revenue it is the future we are facing.
Add in the potential for peak oil in 2012 and the odds of another global recession in the next five years are about 100%.