Interesting CNBC segment (I don’t say that often) from Marc Faber, the editor of the Gloom, Doom, and Boom newsletter, where he says the US and other highly indebted governments will default on their debt. Tip of the hat to Zero Hedge.
Most pundits believe that the US and others will merely print enough money to pay debts, but that doesn’t happen historically when debt to Gross Domestic Product (GDP) ratios get too high. Default is usually the end result. So is he right? I think Japan will be the first to go if this is true. Their government debt to GDP is 200%.
Over the past decade they have been able to run these kind of deficits due to a high internal savings rate from their population. The population has now aged to the point where they have morphed from net savers to spenders as they spend their savings in retirement. Japan’s population is roughly 10 years older than the US so we will start to see this same situation when the average baby boomer reaches 70 years old.
This means Japan will have to implement the Blanche DuBois theory and depend on the kindness of strangers to fund its debt – much like the US. This could result in higher interest rates as they compete with other governments for dollars. This increases the interest payments, and the law of mathematics dictate that this will end badly. Of course, the US debt to GDP is just shy of 100% so we have a ways to go. But rest assured, we are doing our best to change this.