The Golden Solution to America’s Debt Crisis
- The Golden Solution to America’s Debt Crisis
by JAMES RICKARDS, https://dailyreckoning.com/
Right now, the United States is officially $27 trillion in debt. Nearly $7 trillion was added since President Trump took office. This year’s budget deficit is projected at $3.3 trillion, over three times last year’s estimate. The coronavirus is responsible, and the number should be an outlier. But annual deficits will be at the trillion dollar level for the foreseeable future.
Basically, the United States is going broke.
I don’t say that to be hyperbolic. I’m not looking to scare people or attract attention to myself. It’s just an honest assessment, based on the numbers. Now, a $27 trillion debt would be fine if we had a $50 trillion economy. But we don’t have a $50 trillion economy. We have about a $21 trillion economy (at least we did), which means our debt is bigger than our economy.
When is the debt-to-GDP ratio too high? When does a country reach the point that it either turns things around or ends up like Greece? Economists Ken Rogoff and Carmen Reinhart carried out a long historical survey going back 800 years, looking at individual countries, or empires in some cases, that have gone broke or defaulted on their debt. They put the danger zone at a debt-to-GDP ratio of 90%. Once it reaches 90%, they found, a turning point arrives…
At that point, a dollar of debt yields less than a dollar of output. Debt becomes an actual drag on growth. What is the current U.S. debt-to-GDP ratio? About 130% (the reaction to the pandemic caused a spike. It was previously about 105%). We are deep into the red zone, that is. And we’re not pulling out. The U.S. has a dangerous debt to GDP ratio, trillion-plus dollar deficits, more spending on the way. We’re heading for a sovereign debt crisis. That’s not an opinion; it’s based on the numbers. How do we get out of it?
For elites, there is really only one way out at this point is, and that’s inflation. And they’re right on one point. Tax cuts won’t do it, structural changes to the economy wouldn’t do it. Both would help if done properly, but the problem is simply far too large. There’s only one solution left, inflation.
Now, the Fed printed trillions over the past several years, and trillions more over the past several months. But we’ve barely had any inflation at all. Most of the new money was given by the Fed to the banks, who turned around and parked it on deposit at the Fed to gain interest. The money never made it out into the economy, where it would produce inflation.