Harry S. Dent | Friday, December 21, 2012 >>

You’re worried about government debt at $16 trillion?


There’s a bigger number you should worry about. That’s: $120 trillion!

Or, if you prefer smaller numbers, then worry about this one: eight. Specifically, that the $120 trillion worth of debt we have here in the U.S. is eight times GDP.

That’s not the straw that breaks the camel’s back. That’s the granite block that will crush the camel… and anything nearby.

So how do I get to that figure (and the terrifying consequences a.k.a a painful bust)?

Let’s break it down…

The U.S. Government debt rose from $5 trillion in 2000 to $16 trillion in 2012 (and it continues to grow). That alone should worry you deeply as it is over 100% of GDP.

Reasonable – responsible – amounts of debt as a percentage of Gross Domestic Product are healthy for an economy. As levels of debt increase, they become dangerous. When they reach 80% of GDP, they begin to weigh more heavily on our economy (repayment costs, etc.).

And this isn’t just my opinion. This is fact, as corroborated by historical studies (thanks Ken Rogoff and Carmen Reinhardt).

The problem is, in the U.S., government debt is not the biggest monster in our closet. What you should really worry about is the debt the private sector created. I mean shake in your boots worry. That reached $42 trillion at the peak of the overall debt bubble in 2008. More than $22 trillion of which we recklessly signed into existence in eight short years.

That’s nuts!


We got there, in part, because our government decided, in the mid-1990s, that more people should share the American dream by owning a home. So, they told banks to drop their standards for loans and reduced interest rates. They also sponsored agencies like Fannie Mae and Freddie Mac, who bought and backed mortgages with an implicit government guarantee that pushed mortgage rates even lower.

It didn’t take banks long to realize this was the greatest bonanza in history (if you missed it on Wednesday, you should read my article Steps to Prosper in this Debt and Financial Crisis). Home prices went up 2.2 times between early 2000 and early 2006. During the same period the borrowing capacity for a mortgage went from 3.3 times pre-tax income to 9.2 times.

That’s just crazy!

And then there is an entire new sector of debt we never had before: unfunded entitlements.

When corporations have pension obligations for which they have not set enough funds aside, they must declare that difference as unfunded pension obligations. This is by definition a claim against future earnings, like any debt.

What do you think the unfunded debt obligations for Medicare, Medicaid and Social Security are?

The U.S. Treasury estimates their unfunded obligations for entitlements at just over $50 trillion. More credible private estimates from Kleiner Perkins are a whopping $66 trillion.

Now add up present public debt ($16 trillion), private debt ($38 trillion) and unfunded government entitlements ($66 trillion) and you get $120 trillion in total U.S. debt… or eight times GDP.

To illustrate how outrageous this is, at the top of the Roaring 20s debt bubble, total government and private debt was around 1.9 times GDP.

Does anyone think that eight times GDP is enough (besides us)?

Anyone think that we need to cure this debt crisis with more debt?

We clearly have to restructure our massive private debt, our monstrous entitlements and our crazy government deficits and debt. But for this to happen we need crisis.

Only in a crisis will we realize we are this bankrupt.

Only in a crisis will we come up with clear and appropriate solutions.

Neither the Republicans or Democrats can afford to address such an extreme debt situation. That would be political suicide. So a crisis is our only route to redemption.

We will see a financial crisis in the next few years… if not several times during the decade… before we finally deal with our debt addiction and move on into the next demographic boom from 2023 forward.




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Harry Dent
Harry studied economics in college in the ’70s, but found it vague and inconclusive. He became so disillusioned by the state of the profession that he turned his back on it. Instead, he threw himself into the burgeoning New Science of Finance, which married economic research and market research and encompassed identifying and studying demographic trends, business cycles, consumers’ purchasing power and many, many other trends that empowered him to forecast economic and market changes.