June 8, 2012
en route to San Francisco
When you hear two politicians in the U.S. going toe-to-toe arguing about public finances (i.e. money that isn’t theirs), they’ll often cite numbers published by the Congressional Budget Office (CBO).
In political circles, the CBO is considered an honest broker… an objective referee that simply presents the facts without taking a position on the numbers.
As such, it’s usually interesting when the CBO publishes something new about the macro situation of the world’s largest economy.
They recently released an infographic showing America’s debt to GDP ratio over the last 100-years, through World War I, the Great Depression, World War II, the Nixon Gold shock, and the Global Financial Crisis. (click to enlarge)
[As a note, this graphic only shows ‘federal debt held by the public’ expressed as a percentage of GDP. Total federal debt, including debt owed to the Federal Reserve and intragovernmental agencies like Social Security, is much higher.]
It’s really amazing to put in context how much debt levels have risen since (a) the creation of the Federal Reserve in 1913, and (b) Richard Nixon ending dollar/gold convertibility in 1973.
I suspect that our savvy readers will not find this coincidental.
For what it’s worth, both of the CBO’s scenarios for future debt growth seem absurd;
- in the ‘baseline’ case, they assume that the economy grows, spending falls, debt falls, and the unicorns come out to play in the sunshine.
- In the ‘alternative fiscal scenario,’ the office assumes that current spending policies remain in place and debt skyrockets to Japan’s level.
Both of these scenarios are underpinned by an even larger assumption– that the status quo is maintained, i.e. the United States remains the world’s most powerful economic force, can print currency at will without consequence, and can inspire foreigners to buy Treasuries.
This assumption is a major stretch, to say the least.
The realistic scenario to consider is that foreigners lose confidence in the US dollar, the dollar is displaced by gold, the renminbi, SDRs, or some other reserve alternative, and the flood of dollars back to US borders creates conditions for substantial price inflation and/or a total restructuring of US debt.
This isn’t far-fetched at all. Reserve currencies have shifted regularly throughout history, from 15th century Florence to the Spanish Empire to the Ottoman Empire, and this generally leads to painful consequences for whichever country is on its way out.
Naturally, you’ll never see this sort of projection coming from a government office… it’ll just be some version of the status quo in perpetuity.
Rather than relying on some bureaucrat, though, history is really the best indicator for what will happen in the future. It may not repeat, but it’ll certainly rhyme. And history shows that the long-term likelihood is financial repression, severe inflation, and/or default.
The nice thing is that anyone can heed this lesson and take basic steps to reduce any nasty consequences… steps like:
– buying precious metals and storing them abroad
– opening a foreign bank account to safeguard against capital controls
– purchasing foreign property and agricultural land
– diversifying income, business, and investment opportunities overseas.
– obtaining a second citizenship
The options are almost limitless. The time left to take action is not.
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