Part I of this series explained that government spending is the problem.
Part II of this series explained that red ink is a symptom of that problem, but it is also a symptom can turn into a problem.
Today, let’s investigate which nation may be the next to suffer a fiscal crisis.
We’ll start with this chart, which shows government debt as a share of economic output for developed OECD nations.
As you can see the U.S. is one of the worst, trailing only Japan, Greece, and Italy.
Other countries with large debt levels (near or above 100 percent of GDP) are Belgium, Canada, France, Portugal, Spain, and the United Kingdom.
Which one of those countries will be the first to suffer a crisis?
Before answering that question, here are some excerpts from an article I just authored for Canada’s Fraser Institute. I explain how a fiscal crisis is defined and speculate whether nations such as the United States are vulnerable.
A debt crisis occurs when the people who buy and trade government bonds decide that a government no longer can be trusted. At which point, they switch from being bond investors to being “bond vigilantes.” When this happens, interest rates on bonds usually spike because buyers need to be compensated for perceived higher risk. This contributes to a downward spiral for the country since any new debt (and any debt rolling over) is much more expensive to service. …And that certainly describes how Greece went from stability to crisis in just a few months. There is growing discussion that the U.S. could become the next Greece. The concern is understandable. …interest rates on government bonds have jumped. Investors now require interest rates of five per cent or more on 30-year bonds, a significant increase compared to 2-3 per cent just a few years ago. …the U.S. federal government now spends $1 trillion on net interest payments.
Sounds like the U.S. is in trouble. And I think my country is in bad fiscal shape.
But I then issue some important qualifiers.
…the U.S. is vulnerable to bond vigilantes…, but that does not necessarily mean a crisis will happen this year. Or even next year. …interest rates might rise because of a perceived risk of default for a specific borrower, in this case the U.S. federal government. But they also can rise because of a market expectation of higher long-run inflation. …While the government in Washington has been reckless, other countries may be even further down the road to fiscal chaos. France, Italy, Japan, Belgium, Canada and the United Kingdom are just a few of the countries with very high debt levels and weak economic fundamentals. It’s possible—perhaps likely—that bond vigilantes will first descend on some or all of those countries… Moreover, there is a pattern of money flowing to the U.S. whenever there is economic instability. This “flight to safety” could give the U.S. some additional breathing room. As does the dollar’s role as the world’s reserve currency.
But here’s some evidence potentially contradicting one of my caveats.
This tweet from Robin Brooks warns that interest rates are rising. And he says it is because of debt levels because fiscally responsible Switzerland still enjoys low interest rates.
I assume there’s some truth to Brooks’ warning, though maybe investors simply think Switzerland won’t have high inflation compared to other nations.
I’ll close by sharing a depressing chart about unfunded liabilities for spending on old-age retirement programs for nations in the European Union.
Every nation other than Denmark is in trouble. Some of them, like Spain, Austria, and Italy, will be hit by a future tsunami.
The report does not include comparable data for U.S. unfunded Social Security spending, but our cash-flow inflation-adjusted shortfall is a staggering $78 trillion.
And don’t forget health entitlements.
The bottom line is that the U.S. had a major problem with unfunded liabilities when this video was released in 2010. I’m sure it’s much worse today.
So which nation will suffer a fiscal crisis the soonest? Beats the heck out of me, but I know the country I would pick.
