dailyreckoning.com.au / By Bill Bonner / December 5th, 2012
Hearts that are broken, love that’s untrue
These go with learning the game
- Leo Kottke
Yesterday, we learned who will win this game – people who bet against the feds.
Including the promises made to old people, the US owes $86trn – five times annual output. And US debt is increasing 21 times faster than increases in GDP.
No one knows exactly what will happen. But this much is sure: hearts will be broken. Not everyone will get what has been promised to him. It’s not mathematically possible.
Who will get stiffed? In a recent Financial Times piece, Robert Jenkins argued that the US may need a bail-out from the IMF. Why?
Each percentage point rise in interest rates adds (over time) $160bn to annual debt financing. Thus a 5 per cent rate rise adds $800bn to the budget deficit and, given compounding, more than $8tn per decade to the national debt.
The second factor is that more than 45 per cent of tradable US debt is held by foreigners. The Japanese are in hock to the Japanese people. The US is in hock to – among others, the Japanese.
Third: sovereign bonds are no longer presumed to be risk-free. Indeed, there is now general awareness that at some level of financing costs, government debt becomes unsustainable.
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