John Ransom

A former Reagan administration official who worked on trade policy is warning that unless Congress can agree to a significant reduction in spending that the world may run out of money in 6-18 months. When that happens the economy could enter “a death spiral.”

“Based upon world liquidity, the amount of money available to fund sovereign debt in 2011 is between $6-9 trillion,” Marc Nuttle told Townhall Finance. Nuttle runs the site “The world’s government projections for deficit financing in 2011 is $8-10 trillion. We are bumping into the ceiling of the world’s ability to fund ongoing sovereign deficits and debt on an annual basis.”

The $2-6 trillion shortfall will have to come from other parts of the economy like small business loans, the stock market, commercial bonds and consumer spending.   

Unless something is done to reign in spending, Nuttle, an attorney from Oklahoma who served on Reagan’s Industrial Policy Advisory Committee, predicts that the financing of government debt will eat into the world’s ability to invest in public and private projects.

Money that would normally be available to capital markets would have to be switched just to finance interest rate increases. 

“Interest rates may well hit double digits,” he said, “forcing businesses to operate without adequate float for inventory, materials, facilities and production. Businesses will fail, jobs will be lost, salaries and wages will be reduced.” 

The Republican in charge of deficit negotiations reported this week that there has been no substantial progress with Democrats on cutting the spending of the federal government and has shutdown talks in frustration.

“Deficit-reduction talks led by Vice President Joe Biden have reached an ‘impasse,’ House of Representatives Majority Leader Eric Cantor said on Thursday,” according to Reuters, “adding that he will not participate in the meeting of the bipartisan group that had been scheduled for later in the day.”

An unnamed Senate Democrat aide said that both sides need to continue talking, but Reuters says “an aide to Senator Jon Kyl, a Republican member of the Biden group, declined to comment on whether the senator would attend Thursday's scheduled meeting.”

Nuttle says that in order to avert a short-term crisis the U.S. has to take the lead by cutting $500 billion in spending immediately.

John Ransom

John Ransom’s writings on politics and finance have appeared in the Los Angeles Business Journal, the Colorado Statesman, Pajamas Media and Registered Rep Magazine amongst others. Until 9/11, Ransom worked primarily in finance as an investment executive for NYSE member firm Raymond James and Associates, JW Charles and as a new business development executive at Mutual Service Corporation. He lives in San Diego. You can follow him on twitter @bamransom.