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When a sovereign nation can’t readily finance or pay its debts, it’s traumatic.
Bond prices collapse. Interest rates surge to 10%, 20%, even 30%. Federal jobs are gutted. The economy is shattered. The country can go bankrupt, suffer a coup d’état, be shattered by a violent revolution, or worse.
I’ve seen many of these things happen in Argentina, Brazil and Russia. But what’s ironic is that their governments were often not as deeply mired in debt as the giant debt-ridden behemoths of today:
- United Kingdom, with a pileup of public debt that’s now close to 85% of its GDP,
- France, with public debts of over 90% of GDP,
- Ireland, despite its “recovery” from near-default in 2009-10, still indebted to the tune of 117% of GDP,
- Italy, trapped in public debts exceeding 127% of GDP,
- The United States government and its agencies, drowning in debts of at least 138% of GDP,
- Greece, still stuck with a whopping debt load that’s over 158% of GDP, and
- Japan, which tops them all, virtually crushed under a debt mountain of 238% of GDP.
What are the consequences?
Outright default is not the only scenario. Some nations default on the sly with currency devaluations or with the drip-drip-drip of a long-term currency slide. Others beg and squirm for bailouts, which is a de-facto default. Regardless of the precise path, the end of the road is ugly.
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Two weeks ago, I warned you of new and bigger shockwaves that are likely to strike Europe, not just financially but also politically.
Last week, I demonstrated how the government debt crunch in Japan is actually worse than most people think.
And this week, it’s time to bring this story back home.
U.S. Federal Deficit to Haunt Trump
Will a bond market crisis suddenly burst onto the American scene tomorrow? No. But when it does, it will be too late for investors to protect their money — let alone for Uncle Sam to turn the tide.
Here are the critical facts …
Fact #1. Already, the Congressional Budget Office (CBO) is estimating a cumulative deficit of $3.5 trillion from 2018 to 2022, and a massive $9.4 trillion deficit from 2018 through 2027.
Fact #2. Assuming Congress makes no significant budget changes and the economy holds up well, the CBO forecasts that the deficit in fiscal year 2018 will be 2.4% of GDP. That’s a tad less concerning than in recent years.
But, the CBO also predicts the deficit will surge to 4.2% of GDP by 2022, and then grow even larger in later years. Plus, never forget: ANY deficit, however small, adds still more to the huge pileup of public debt.
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Fact #3. The nonpartisan Committee for a Responsible Federal Budget, which has always been equally critical of big spenders whether Democrat or Republican, estimates that the recently proposed Trump tax plan could cost anywhere from $3 trillion to $7 trillion in lost government revenues over ten years.
Economists from all persuasions agree that, although some of those revenues could be recouped from better-than-expected growth in the economy, it would take a pie-in-the-sky super boom to get them all back.
Fact #4. None of these forecasts take into account financial threats from beyond U.S. borders — especially the kind of sovereign debt crises in Europe and Japan that I’ve covered over the past fortnight. When bonds collapse overseas, the collapse can spread like a contagion to U.S. markets virtually overnight, bloating the U.S. government’s interest costs, weakening the economy, or worse.
Fact #5. Wars can make mincemeat of federal budgets: When a country goes to battle against foreign enemies, the rallying cry in the capital is “deficit be damned!”
The wars in Iraq and Afghanistan alone have cost U.S. taxpayers nearly $5 trillion, including not only spending by the Defense Department but also the State Department, Homeland Security, and the Department of Veterans Affairs. A direct conflict with a major world power, even limited to conventional weapons, could cost much more.
Clearly, the deficit still matters: In the not-too-distant future, it could make the difference between big investment successes and outright investment failures.
So what do you say to someone who’s impatient for better yields and wants to lock in some extra interest with medium-term notes, long-term bonds or other long-term commitments?
Don’t touch ’em with a ten-foot pole!
Good luck and God bless!
Martin
Dr. Weiss founded Weiss Research in 1971 and has dedicated his entire career to helping millions of average investors find truly safe havens and investments. He is Chairman of the Weiss Group, which includes Weiss Research and Weiss Ratings, the nation’s leading independent rating agency accepting no fees from rated companies. His last three books have all been New York Times Bestsellers and his most recent title is The Ultimate Money Guide for Bubbles, Busts, Recession and Depression.
{ 29 comments }
Thank you for some common sense thinking. In the small family unit if income shrinks, then cuts must be made in their spending. At some point no more cuts can be made without danger to the family, and income MUST increase to keep things afloat. An unemployed person (no revenue) does not cheer, saying the lack of revenue will now contribute to fantastic growth. It is a cause for grave concern in the family, and should be in a government as well. While no one wants excessive taxation, the tax cuts of the past have only provided small amounts of growth, and a huge increase in inequality, which can lead to the social unrest you speak of. We want the things government can provide like help during hurricanes and earthquakes, a good solid military and care for veterans, infrastructure, healthcare, and help for the poorest and disabled among us, to name a few.
Democrats have been accused of “tax and spend”, but Republicans “borrow and spend”.
We have fought wars without taxation to pay for them, and during the time of war have lowered taxes hoping for amazing growth which could not happen. It’s time for reality to replace theories.
We have a chance to work for peace and prosperity in this country and yet we seem at war with ourselves. Yet most will be surprised at a collapse when it comes.
So where are the answers? Stay away from Sovereign debt? I’ve been invested in hard assets for almost 8 years, own a higher percentage of gold than recommended because of my concern over all the debt and I have lost the battle to the fed. I am not changing my strategy now but your statement is not actionable unless its intention is being a adveratising teaser in which case your email was misleading.
If cooler heads in Congress prevail, there will be no tax reform, even as much as it is needed. There will also be little or none of the spending on infrastructure, etc., which Trump has called for. They will probably go ahead though, with his attempts to create a global empire. Militarization is popular with voters, since it means JOBS, producing all those weapons systems. When the economy fails though, that powerful military may well stage a coup, as powerful militaries often have in other nations.
Simply stop electing Republicans…… This ALL started when Reagan cut taxes to his benefactors, the Ultra Wealthy, but did not have the guts to cut spending, even when he and other Republcian Presidents, had a Republican Majority in Congress. The ONLY President since then to hold the line was Clinton. Obama had no choice but to spend and borrow big time to save the Markets and the Economy after the Cheney/bush Stock Market Crash (60% loss) and Depression of 2007-2009…. Look at any reliable deficit chart from 1982 (The Republican Revolution) forward.
The two party system is designed to divide, distract and conquer it’s citizens as Congress operates the largest criminal racketeering syndicate in history. They have ample income to operate if not for rampant waste, fraud and abuse. We can turn it around with:
Term limits
Ban political parties from government
Outlaw lobbyist, bribery and racketeering
Election by lottery for qualified citizens
Stop the unmitigated disaster War on Drugs
Return power to States
Stop wars, nation building
Secure the border
Repeal the Federal Reserve Act of 1913
Eliminate the Fed Reserve and reclaim our currency
Harsh jail sentences for corrupt politicians, that would be all of them.
Take money out of politics and politics out of government
Raising taxes, more theft of hard earned taxpayer $ only leads to more waste fraud,abuse.
This is an investment site….. The Average Citizen has ALWAYS done better when led by Liberal Progressives. Roughly since 1900 they were called Democrates. Whether you go back 40 years, or from 1929 forward.
From the beginning of our country the Average citizen has done bettter when led by Liberal Progressives which at one time were Republicans. For example Lincoln was a NOT a Conservative. At that time the Conservatives were Southern Slave Holders and where called Democrats.
Study American Economic History…
Sovereign Nations, with their own currency, have no problems with their government debts. They cannot go bankrupt in their own money. They can create the payments from thin air, which is what being monetary sovereign means.
The problems are the private sector debts. They have to be paid back. With Government debts all the gov has to do is reverse the transaction that was done to buy the bonds in the first place. Just a few keystrokes is all it takes.
What would happen if all of the debt in the world was simply forgiven and all the levels reset to zero? What would need to change? I know the way we lend money to others would have to change.
Good comment Martin.
By the way, Budget deficits are a good thing. Why? Well the annual accounts have to balance at year’s end. So comparing the Tax take against the tax “revenue”. The private sector has to make up the difference if the government falls short on D-day. So if the budget
is in Surplus then that means it ‘s spending failed to match the tax sum. So to balance the non government sector sees money draining away from its control and a recession is likely to happen. The Clinton surpluses led directly to the Bush recession in 1993. Budget surpluses are only a good idea if the economy is overheating. Otherwise there needs to be deficits, and the Output Gap is there to exploit!
RIGHT ON
What is amazing are companies that have been “operational long-term,” such as Amazon without making profits. How does it continue to operate in a deficit mode? It has to be nothing but generating large amounts of revenue, but most companies doing the same thing get crushed, if they miss on profits.
Is the US and other countries, operating in the same mode as Amazon? What happens, if “outside” investors stop investing in our markets? How much money outside the US has come into our markets in the past year or two? $1 Trillion or more? The report showing money flows into the US has a 6 month delay, which is crazy stupid. This report should be monthly.(?) Lately, we have been the only game in town, but many EM’s have started to turn around, which subsequently moves money outside the US to those countries. Will that have a negative affect for US markets? It would be nice find out, just how much affect that would be for “us.”
FISCAL MANAGEMENT SEEN AS “GAME OF CHANCE” ?
We just keep going in the same general direction as if elections never happened !! Al Lewis, then Business columnist with the Denver Post wrote me 7 years ago: ” We know it won’t end well, but we hope it won’t end soon”.
Is this our national debt management policy? President Donald Trump hopes tax cuts ( whenever they are enacted) and economic growth will cover our growing national debt balance. We are still Hoping for the best, like a chronic gambler in Las Vegas doubling-down for the ever-elusive Lucky Strike. General Optimism is fine and good, but is it really helpful or able to prevent a future train wreck ? More like collective denial ( The President Can Fix It ).
Frightening times Martin, no-one raises the question of what would happen to China, Japan, Korea, the house of Saud, to name a few, what would happen to pension funds, this affects all, whether still contributing (and wondering why), about to retire, and wondering whether you can afford to stop working, assuming you have the luxury of choice…you may be 80yrs old as I am, and wonder what to do if your pension fund goes belly up….pensions will be way down on the list of priorities….I said that ‘this cannot continue’…way back in 2002, but 15 years and trillions later, we still ask the same questions…..I now live in Chiang Mai, Thailand, I watch how self contained the local people are, the grow their own food and trade any surplus, they live on very little and appear to be grateful, contented and happy with the little they have.
God bless,
bryan
If we cannot own bonds (5-7 years), stocks (due to high P/E etc), where can we put money (cash or cd)? And, selling stocks with large capital gains inflicts huge, and I mean huge tax bill, what to do is the big question. (A little afraid of doing inverse investments. Need help!!
You see comments all over the internet,with Democrats blaming Republicans and vice versa.The real problem is a too powerful,intrusive govt in the hands of voters who demand more from govt than they pay in taxes.So,we get deficits.You can’t blame politicians,from either party,doing what the citizens demand,to get elected.The only solutions would be more honest,intelligent voters or a much smaller govt.Don’t see either happening.So,when will the system collapse?Can govt just continue devaluing the currency to keep debts manageable?I know that Social Security payouts are rising less than inflation,so they are being reduced,over time.I think about the retired guys who bought gold,back in the late 1970’s,thinking the financial system was doomed and probably died with a loss,so hard to tell when/if the system crashes.
All great points. Let me add I am a proponent of reforming Social Security from a bankrupt ponzi scheme to a model Australia and NZ uses. Employees contribute a dollar, employers contribute a dollar and government adds a dollar into a privatized retirement account. The average Aussie retires with over a half million dollars. That is true security. Our corrupt racketeering politicians will never give up that ponzi scheme as it is stolen, wasted as fast as it comes in it vanished into a pool of red ink.
A wise man once said “Deficits don’t matterâ€
There are some things I just don’t “get.” Everyone and I mean everyone is critical of Trump’s plan to reduce taxes.
From what I have read, EVERY Government, NO EXCEPTIONS that has been brave enough to cut taxes has enjoyed INCREASED revenues as a result.
Isn’t that the desired result?
No, that is Fake News. Reagan did it and that is where our Deficits began to go to the moon….. It was called “Trickle Down Economics” and it was a Scam which resulted in the current disaster…..
check out Kansas results
Isn’t that the state that is going broke, who’s schools are running a deficit, where job growth is declining and who’s citizens, a great percentage of whom , can’t get health coverage? Did you know that Kansas is currently #4 on the list of 10 states that are currently running a populaton deficit as thier citizens are leaving in great numbers?
Dear Dr.Weiss: Thanks, for sharing your advice on long term bonds, or other long term commitments. I agree with your treasury bond concerns; however, I hope some shorter term muni bonds, in safer states, that are not as risky, if they are invested in General Obligation tax protected state and federal bonds, on vital investments. Any concerns ? Most are under 2 years of maturity.
It’s real simple. Taxes must go up and spending must go down. Since taxes for the top came down the most so they should go up the most. Our precious middle class who hid behind duct tape and plastic during the Bush years should kick in their share too. Since Trump is deporting many who have taken our jobs we can cut back some welfare and give the former recipients the newly created opportunities. Since we spend over a trillion dollars per year on security throughout the whole World we can remove our noses from everyone’s business and cut it back a few hundred billion per year. It’s real simple.
We still need to withdraw from those Republican Trade agreements called GATT and NAFTA which have removed millions of “Middle Class” jobs from America to China and Mexico at great profit to those that sponsor those Republican candidates
Estimations and predictions are not facts.
Martin,
You are spot on, the only one problem the idiots that run the show want a war to cover up there screw ups, these idiots really think they can win a nuclear war, they are out of there minds, you Americans have to wake up, you need a revolution?
Even the deep state are worried and they run the show?
Rather confusing out here and even within your organization. One side I think Mr. J Markham of your company talks of a roaring stock market in the years ahead. You talk of possible imminent collapse who is one to believe.