Where Is The Next Sovereign Debt Crisis?

The US had a public debt of just $75 Million in 1791 and for more than a century afterward, the total public debt averaged just 2.5% of US economic production (GDP). Today’s Government Debt is estimated to be $22 Trillion at roughly 107% of the size of our annual GDP. Historically, during economic downturns, our political leaders have promoted above trend deficit spending to get reelected and allegedly to boost the economy. After decades of profligate spending since we abandoned the Gold backed Dollar, the fear of a debt crisis has grown with each recession. When will the inexorable rise of the US or global debt become the straw that breaks the camels back? Or will we always hear the false cries of Chicken Little that “the sky is falling”? (1800’s Folklore)

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In recent decades we have increasingly relied upon the kindness of strangers to bail the US out of recessions as countries with excess reserves have bought an increasing proportion of our debt. They send us their goods, collect our dollars and invest those dollars in our Treasury debt. Historic episodes of converting those Dollars into supporting our debt occurred with OPEC in the 1970s and Japan in the 1980s and 1990s. In the 2008 crisis, China became our great wall of debt supporter with over a Trillion dollar of US Treasuries. In recent years China, Japan, and others have curtailed their penchant for not so rare US debt with their own domestic stimulus itself and risk diversification priorities. Since China helped fund our 2008 subprime mortgage meltdown the US has had to rely increasingly upon itself for debt financing. The US Government is selling greater proportions of its new debt issuances to itself to create dollars. We call that printing money. In this brave new world, the financial markets have yet to blink, trusting the full faith and credit of our Government, as there is no realistic alternative.

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