I have been writing about sovereign debt risk for some time. Japan, Spain, Italy and Portugal are all facing serious fiscal deficits and funding problems within a few years. But Greece may be the first country to hit the wall. In today's Outside the Box, we look at a short column by Ambrose Evans-Pritchard of the London Telegraph on the problems facing Greece. Greece will soon be faced with deciding which bad choice to make among a very small set of really bad, difficult choices.
And then we turn to a piece by Edmund Andrews in the New York Times about the funding problem facing the US. The US is going to have to borrow at a minimum $3.5 trillion in the next three years according to Obama administration officials, and it is likely to be much higher. And rates are likely to be rising. As Andrews notes "Even a small increase in interest rates has a big impact. An increase of one percentage point in the Treasury's average cost of borrowing would cost American taxpayers an extra $80 billion this year." If interest rates were at the same level as a few years ago, interest costs on the debt this year would be $221 billion more than they actually were.
We are not yet Greece or Japan. But we are working on it given the current direction. At some point the bond market is not going to "go along" for the ride. Read these pieces and think about them.
As I often write, if something cannot happen then it won't. Greece cannot go along the same path they are on. While today we are blithely ignoring the debt problem, the US cannot continue with massive deficits without serious consequences.
With that being said, for those in the US, I wish you a very Happy Thanksgiving. My intention is to write a letter this Friday as usual, assuming I can roll out of bed after the feasting. I am told by very reliable sources that thanksgiving calories do not count, and I intend to take advantage of that.
Your still hopeful we will find a way to Muddle Through analyst,
John Mauldin, Editor
Outside the Box
Greece tests the limit of sovereign debt as it grinds towards slump
Greece is disturbingly close to a debt compound spiral. It is the first developed country on either side of the Atlantic to push unfunded welfare largesse to the limits of market tolerance.
Euro membership blocks every plausible way out of the crisis, other than EU beggary. This is what happens when a facile…