Warning: This stuff may be a bit scary. Let's start off by reviewing the events of the past few days. Standard & Poor's downgraded the sovereign debt of Britain from "stable" to "negative" because Britain's debt could equal 100% of GDP and stay there for a few years.
Now word has traveled across the pond and has spread concern here in the U.S. Our debt is exploding and will also rise faster than our GDP. At the end of 2008, U.S. federal debt will equal 41% of GDP. It is expected to rise to 82% of GDP in 10 years and could reach 100% of GDP in fifteen years. Such a debt burden is incompatible with our triple-A rating.
It is feared that such a debt burden would be worse than the recent financial crisis. If we fast forward 10 years, the estimates are that our debt will be $1.2 trillion while our tax revenues would be $2 trillion. This means that we would need a 60% tax increase to balance the budget.
Of course inflation would do the trick. A 100% increase in prices means 10% inflation for 10 years. This sounds off the wall but the effects of 100% inflation would depreciate the dollar 100%, the Japanese could buy a dollar for Y50 and the price of gold would be $2,000 per ounce.
The Congressional Budget Office (CBO) estimates that the budget deficit will be the same in the year 2019 as it will be in 2010.
So for now its anyone's guess what will happen. The dollar is already under pressure and chances are that we will see more of the same.
Do you believe that we will survive this mess?
Why do we have a weak dollar?
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