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  • The Global Government Debt Bubble

    This Friday the New York Times reported:

    Even as Congress looks for ways to expand President Obama’s $819 billion stimulus package, the rest of the world is wondering how Washington will pay for it all.

    “The U.S. needs to show some proof they have a plan to get out of the fiscal problem,” said Ernesto Zedillo, the former Mexican president who helped steer his country through a financial crisis in 1994. “We, as developing countries, need to know we won’t be crowded out of the capital markets, which is already happening.”

    Heritage scholar J.D. Foster puts some real numbers to Zedillo’s concerns:

    While forecasting federal borrowing beyond 2009 is speculative, the combination of current law programs plus the stimulus–and without any additional borrowings for additional financial market interventions or other new spending–suggests at least another $1.6 trillion of new government debt, bringing the total of publicly traded federal debt to $9.9 trillion by the end of 2010.

    A common means of putting such figures into perspective is to compare them to the size of the economy. At the end of 2008, the ratio of federal debt to GDP was about 44.9 percent. Under the assumptions here about new issuance and using the CBO forecasts for nominal GDP, debt at the end of 2009 will be about 57.9 percent, an increase of 13 percentage points in just a single year. By the end of 2010, the debt-to-GDP ratio will have reached 67.9 percent for a two-year increase of 23 percentage points.

    Using the consensus estimates, by the end of 2010 interest rates will be up another 0.3 to 0.5 percentage points, for a total increase due to the government debt bubble of 0.7 and 1.1 percentage points.[2] That would mean that today’s mortgage rate of 5.33 percent would be between 6 percent and 6.4 percent. Such increases in interest rates would significantly weaken the economy further and delay for many months any hope of significant recovery.

    The consensus estimate for interest rate effects also implicitly assumes that governments around the world are largely following their own normal fiscal policies. In contrast, the global recession has caused deficits to balloon almost everywhere, and governments worldwide are considering their own massive programs to stimulate their economies. So the United States will be offering this great wave of federal debt to the credit markets while most other countries will be doing the same. Because interest rates are set on global markets, this even larger global wave of government debt is likely to have much greater interest rate effects than would be the case if the United States were acting alone.

    Posted in Ongoing Priorities [slideshow_deploy]

    5 Responses to The Global Government Debt Bubble

    1. richard weirton says:

      Liberalism in full bloom. When has our government ever solved a problem? Amtrak a good example: has not shown a profit in 40 years, yet is in line for a BILLION dollar bailout.

      If Amtrak has never made a dime, where did it get the money to advertise on the super bowl????

      That's our money being spent. Do you know how expensive it is to advertise on the super bowl?????

    2. Wayne from Jeremiah says:

      I've linked to your post as a resource for Global Economy Watch

    3. Pingback: Interest Rates » The Global Government Debt Bubble » The Foundry

    4. John, Colorado says:

      Let's spread the truth, Congress is a bunch of shysters who without fail spend 150% plus more than they take in, and are in debt so deep they will never get out.

    5. John Theobald, Marie says:

      Conservatives and republicans (traditional that is – small government, low taxes) need to tell the liberals and progressives to stick this spending bill of their pet projects where the sun does not shine. It is THEIR boat anchor and real Conservatives and republicans should have absolutely nothing to do with it. It is an "OBAMAnation" of wreckless government behavior and should be rejected outright.

      China isn't buying boys … your Communist sugar-daddy is closing the bank. Keep cranking up the $$$$ printing presses … you'll destroy this economy for a generation.


      "We must not let our rulers load us with perpetual debt. We must make our election between economy and liberty or profusion and servitude. If we run into such debt, as that we must be taxed in our meat and in our drink, in our necessaries and our comforts, in our labors and our amusements, for our calling and our creeds…[we will] have no time to think, no means of calling our miss-managers to account but be glad to obtain subsistence by hiring ourselves to rivet their chains on the necks of our fellow-sufferers… And this is the tendency of all human governments. A departure from principle in one instance becomes a precedent for[ another]… till the bulk of society is reduced to be mere automatons of misery… And the fore-horse of this frightful team is public debt. Taxation follows that, and in its train wretchedness and oppression." — Thomas Jefferson

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