The Everything Bubble Series: Can A Nation Grow Its Way Out of Debt?

Last week, I outlined the truly staggering amounts of debt the world currently owes.

By way of review:

  • Globally, the debt-to-GDP ratio is 322%.
  • United States: 106%
  • Germany: 61%
  • Japan: 196%
  • The United Kingdom: 85%
  • Canada: 89%
  • France: 98%

Now, there are three ways to deal with excessive debt:

  1. Pay it off through growth or fiscal restraint.
  2. Default/restructure.
  3. Attempt to inflate it away by debasing your currency.

Today we will be embarking on a three-day Everything Bubble series to break down each of these three options… and discover which option the global system will have to resort to.

First up, option #1 is impossible for most nations.

Option #1: Pay Off Debt Through Growth or Fiscal Restraint

First and foremost, debt levels are so massive that achieving high levels of growth is much more difficult.

Think of it this way: Let’s say you earn $100k in salary per year and you have credit card debt equal to $105k. Would a salary increase to $105k really make a difference in your spending habits under this scenario?

Not in the slightest.

Indeed, in order to “grow” your way out of your debt problem, you’d need your income to skyrocket to something like $200k or so. The odds of any country today seeing its GDP grow that rapidly is impossible.

As for the second part of option #1 (fiscal restraint), this is also all but impossible.

Over the last 50 years, governments have proven they are good at one thing only: spending money. In fact, most Western-style political campaigns today center on how a given candidate wants to spend money to solve a given problem.

The basic outline for any political campaign in a western-style democracy is as follows:

  • Candidate A campaigns on a platform of fixing various social or economic problems.
  • As far as the government is concerned, solving these problems involves spending money.
  • The money that the government uses to “solve” these problems is generated via tax revenues.
  • If tax revenues are not enough, the government issues debt.

In simple terms, government solutions to problems usually involve creating a government program.

As a result of this, over the last 50 years, the number of social spending programs in the US have ballooned to the point that today more than 59% of the United States’ federal budget goes towards some kind of social spending, with some 49% of American households receiving some form of government assistance.

That comes to more than 150 million people.

In this environment, cutting social spending is akin to committing political suicide. Aside from angering potential voters, any politician who pushes for spending cuts is opening the door to political attacks from opponents who are only too happy to point out how heartless he or she is to propose this.

So fiscal restraint won’t solve the nation’s debt problems either.

But what about default or restructuring the debt? After all, many nations have defaulted in the past. Why couldn’t the US or some other major nation do so now?

I’ll address that issue in tomorrow’s Money & Crisis. Until then…

Best Regards,

Graham Summers
Editor, Money & Crisis

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Graham Summers

Editor Graham Summers has spent the last 15 years building a reputation as one of the most sought after and highly respected investment strategists on the planet. His work has been read and quoted by former Presidential advisors, award-winning institutional analysts, U.S. Senators, and more. He’s one of the few analysts on the planet to...

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