Global Bankruptcy Months Away?

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 DebtWall.org. “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.

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“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.

“This will not completely solve the problem but it is an adequate step in the right direction,” Nuttle said. “This is the necessary amount that will alleviate pressure on the funding of 2012 world sovereign debt projections. It is still possible to develop a four-year plan to avert hitting the debt wall, but the plan requires immediate cuts in the deficit.”

A recent Rasmussen poll shows that Americans are concerned about the government’s ability to pay its debts. The survey released June 1^st, “finds that 66% of American Adults are at least somewhat worried that the U.S. government will run out of money,” while “separate surveying has found that 50% of Likely U.S. Voters think it’s more likely that the government will go bankrupt and be unable to pay its debt before the federal budget is balanced.”

With the end of the Fed’s policy of quantitative easing, financing U.S. government debt is going to present a challenge almost immediately says Peter Schiff, president of Euro Pacific Capital.

“There’s no real private demand for Treasuries,” says Schiff, pointing out that central banks have been the main buyers. “No one buys them to hold them. They flip them, just like condos in Vegas.”

As a consequence either rates will have to go up to attract real buyers or the governments around the world will have to continue to subsidize U.S. debt, which will lead to a world “awash in inflation.”

Nuttle points out that under current artificially low rates, the interest on the U.S. debt is $187 billion. If interest rates were to go back to the historic norm of 4 percent, interest on the debt would come in at $600 billion. 

In fact, Schiff says the low interest rates are holding back the recovery.

“Rates are going to have to go up, if you want to put people back to work. You can make rates as low as you want, but it does no good. Because if banks can get compensated for the risk,” through higher rates, “they aren’t going to loan money.”

Rates will have to go up or the economy is going to have to change, Schiff says.

“Money will have to come from someplace to finance government debt. Consumer spending, stock market, someplace.”

Nuttle predicts that when that happens, “The economy will enter a death spiral of increasing business failures, fewer jobs, higher prices, higher taxes and stagnant growth. Liberals in government will use the ensuing economic crisis as a pretext for increasing the size and scope of government.”

If that’s what’s going to happen, it sounds kind of like we’re out of money already.

Because, really, we are.