Market Talk

This wasn’t the story I was looking to direct you to, but it hits on a theme we’ve been harping on here at Market Talk, so I had to mark it. Perk up your ears, Mouseketeers, because you’re going to be hearing this a lot more in the next couple years.

Real Times Economics picks up on the debt theme, noting that the $13 trillion in U.S. national debt equals 88% of projected 2010 GDP (in a post earlier this week, I compared it to 2009′s GDP and arrived at 90%, but little difference; at current growth rates for both it will soon be 100% of GDP.) That puts the U.S. in a dangerous situation. From the Journal’s Mark Whitehouse:

We’re borrowing to bail out consumers who took on too much credit and couldn’t pay, and to support social-security and Medicare systems we can’t really afford. We’re able to do this because financial markets have maintained a surprising faith that we will eventually get our spending under control, and because the dollar’s role as a global reserve currency has kept our borrowing rates unusually low.

The travails of Greece demonstrate the hazard such easy borrowing terms can create. After Greece adopted the euro, markets began to treat it more like any other European economy, allowing it to borrow at interest rates nearly the same as Germany or France. That, in turn, helped Greece get into much deeper debt trouble than it would have otherwise. As a result, it now has to implement austerity measures that will likely yield much deeper economic pain.

I’ll tell you, folks, we are crossing the Rubicon. We are going to be forced into some very hard choices, choices we have been putting off for years, no matter how the economy’s doing. That’s the real takeaway here, that soon no matter how fast the economy is growing, it won’t be able to keep up with our debts.

I disagree with Mark on one point, though. I don’t think our creditors and the markets are giving the U.S. a pass because they believe the government will eventually get spending under control. There simply is zero evidence that that’s going to happen. No, the markets are giving the U.S. a pass because the thought of a sovereign debt crisis in the world’s largest economy, which prints the world’s reserve currency, and which is in times of trouble the ultimate safe haven, is simply too terrifying to even contemplate.

But you’d be wise to do so.

The most important piece of news this week wasn’t the ADP report, or the weekly jobless claims. It wasn’t the ISM’s service-sector report, or the latest updates on BP’s Gulf oil spill. It wasn’t the Gore’s split-up, or even Armando Galarraga’s stolen perfect game, and it won’t be Friday’s jobs report for May. No, the most important piece of news this week, the one that will have the most lasting impact, was this:

The national debt crossed the $13 trillion mark.

It wasn’t a surprise, of course. Anybody who walks on 45th 44th Street by Sixth Avenue has seen the big debt clock there over the IRS office. It’s been rising steadily. But crossing another milestone, and so quickly after we crossed the $12 trillion mark, really should be yet another wake-up call for the nation. You think the Macondo well’s a real gusher?

Gross domestic product in 2009 was about $14.4 trillion. That puts the national debt at roughly 90% of GDP. That’s a danger zone beyond which nations don’t generally recover. Even for the world’s largest economy, we are passing the point at which we can still earn our way out of our debt, no matter how many jobs we create.

Now, obviously, nobody but nobody wants to call the government of the United States to the mat about its debt. A sovereign debt crisis in the world’s largest by far economy would be like dropping a dozen nuclear bombs on the global economy. Nobody would recover. So expect the world to nervously play along as our duly elected leaders pretend to have a firm grasp on this problem.

But we are at the point where some painful choices are going to start forcing themselves on us (indeed, at the state level, this is already happening.) Higher taxes. Cuts in services. Cuts in benefits and entitlements. Maybe even a shrinking of the military. All the options are going to have to be on the table, because very soon, if not already, we won’t be able to just jawbone this problem any more.

(Photo: Paul Vigna)