Sunday, May 16, 2010

A broader view of debt

The U.S. Federal debt of $13 trillion and current annual deficit of $1.5 trillion are only part of the problem. State and local governments are collectively in debt to the tune of about $3 trillion and are adding $200 billion to that number this year. Mortgage, consumer and credit-card debts total another $16 trillion. All told, U.S. citizens are on the hook for $32 trillion of debt, or more than $100,000 per person on average.

If we were to enact Geek-like "austerity measures" to pay down Federal, state and local debts, it would involve some combination of drastically cutting programs (Medicare, Medicaid, Social Security, unemployment, welfare, military) and raising taxes. Needless to say, a combination of vastly reduced government payments and higher taxes would squash the take-home pay of the average citizen, making it far more difficult to pay off personal debts. Greece was able to convince several much larger economies (also in debt) to bail them out - I doubt we'd be able to find such saviors when we reach the brink.

Any way you slice it, it's looking less and less likely that all of these debts can be paid off in full. Printing money (and high inflation) may be the only way to prevent massive worldwide defaults.

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