Too Much Debt

As we can see from the chart that was shamelessly borrowed from The Daily Reckoning, US government obligations are taking off at an unprecedented rate. In an earlier post, we examined the impact of $106 Trillion of debt. Now the amount is higher and growing rapidly. We can note that the rate obligations are increasing is much higher level than the growth of tax revenue. We see debt grow by 45% or so in the 2004 to 2009 period, while tax revenue, it has been reported, grew 12% in the same period. Dear reader, this means that spending on present and future obligations has outstripped revenue by a factor of 4. Compounding the problem is the fact that in the past two years, government tax revenues have been shrinking!

Clearly, we do not have a revenue problem, but instead a spending problem exists that will have massive negative consequences for the economy within just a few years.

The current obligations amount to no less than $377,000 for each man, woman & child in America. That is $1,508,000 per family of four.

Clearly, with this level of debt repayment of even interest alone is impossible.

With the current government, I see one of two possibilities:

1) Large spending cuts (very unlikely)

2) Massive Quantitative Easing (printing money and monetizing debt like there is no tomorrow)

My suspicion is that as credit shrinks, QE will increase over the next 1 to 5 years to a level that begins to increase the rate of inflation as government tries to inflate away its debt. It will be difficult for the Fed to accomplish this as deflationary pressures are enormous, particularly if credit begins to re-freeze as I postulated in an earlier post. However, a determined government with a fiat currency and modren printing press, can overpower deflationary forces with a large enough increase in currency production.