10.2 Trillion Dollars is what the USA must repay back 2015

ByMark Whitehouse

Number of the Week

$10.2

Trillion

$10.2 trillion: The amount of money advanced-nation governments will need to borrow in 2011

As the debts of advanced countries rise to levels not seen since the aftermath of World War II, it’s hard to know how much is too much. But it’s easy to see that the risk of serious financial trouble is growing.

Next year, fifteen major developed-country governments, including the U.S., Japan, the U.K., Spain and Greece, will have to raise some $10.2 trillion to repay maturing bonds and finance their budget deficits, according to estimates from the International Monetary Fund. That’s up 7% from this year, and equals 27% of their combined annual economic output.

Aside from Japan, which has a huge debt hangover from decades of anemic growth, the U.S. is the most extreme case. Next year, the U.S. government will have to find $4.2 trillion. That’s 27.8% of its annual economic output, up from 26.5% this year. By comparison, crisis-addled Greece needs $69 billion, or 23.8% of its annual GDP.

So far, with the notable exception of Greece, major advanced nations haven’t had too much trouble raising the money they need. Japan’s domestic investors have consistently bought its government bonds despite their low yield. Foreign investors have been snapping up U.S. Treasury bonds, which remain the world’s premier safe-haven investment.

Still, there’s reason to be concerned that governments’ appetite for borrowing could ultimately push up interest rates, or worse.

For one, government borrowers are tapping into smaller international capital flows. The total amount of foreign portfolio investment sloshing in across advanced countries’ borders averaged about 3.8% of global GDP in the twelve months ended June, compared to an average 9.5% in the eight years leading up to the recession.

Beyond that, the U.S. and other advanced nations are putting pressure on China to allow its currency to appreciate against the dollar. All else equal, such a move would curb demand for dollar-denominated debt from a country that is the largest foreign holder of U.S. Treasurys.

In the U.S., domestic investors could pick up the slack. The Federal Reserve has committed to buy an added $600 billion in U.S. government debt over the next eight months. Demand from households has been very strong as U.S. consumers boost their savings rate. Tighter regulations could push banks to buy more safe assets such as U.S. Treasurys.

But as the IMF warned in a report this week, the chances that investors will balk at lending to governments “remains high for advanced economies.” That’s a highly undesirable outcome — picture a financial crisis in which governments can’t step in to help, because government finances are the problem. We can’t know how close we are to such an outcome, and the need to keep the recovery going would make cutting back now a risky move. Ultimately, though, we’re heading in the wrong direction.

You can't manage a debt by withdrawing "blood" from the economy. The economy gets weak. It can no longer handle the public and private debt.

And as for increasing total debt to GDP, the US is a prime example, from The Marketoracle:

Now let's put the above in perspective. The sharp increase in total debt to GDP that took place after 1930 was not just due to FDR's spending, but it was due to the equally sharp drop in GDP that occurred during the Great Depression. Thus, the GDP figure collapsed, making the debt, as a percentage, higher.

I fear that although this chart shows the diminishing impact to GDP of each additional dollar of debt in the US Economy, the same holds true for just about every other advanced nation. And what I really fear is that much of the wealth we have enjoyed the past few decades was illusory. No one knows how much of the wealth was illusory, but with the unavoidable debt collapse that is underway, I'm afraid it's a lot.

Now imagine this: what if every advanced nation balanced its budget next year, as the "Austeritists" would like to see? What if no one borrowed the 10.2 Trillion the advanced nations would need next year? Well, to describe it's impact to the global economy, I'll use a picture:

It would be catastrophic. I want to make something clear: I am no neo-Keynesian. But if an economic/monetary system collapse is unavoidable, why should any individual nation accelerate its impact if other nations are preferring to print to delay the inevitable? Why be the first to commit suicide?
We have a dilemma here. My opinion is the only solution is a revaluation of gold and a return to a gold standard. And I mean a strong revaluation. The only way to balance the world economy, and pay down debts, is with a gold valuation in the tens of thousands of dollars an ounce. Right now, the debtor nations have a disproportionate amount of gold compared to the surplus nations. There are exceptions, but overall, that holds true.
A revaluation of gold, with a gold monetary system of sorts, is the only way to rebalance world trade, and to start anew. There is one more option: Global War and the victor dictates to the rest of the world the repayment terms.
Those are our only two choices. Monetarism and Keynesianism are merely choices that delay the inevitable - temporary bandages. The inevitable is a rebalancing of the world economic system, either we can control it through gold, or we will be forced to allow the unavoidable slip of the dogs of war to decide for us.

Fiat Collapse: Why Only Gold Can Rebalance the World Economy http://fiatcollapse.blogspot.com/2010/11/western-world-plus-japans-...