Niall Ferguson: U.S. Fiscal Crisis Will Likely Occur Within 2 Years

by: The Housing Time Bomb

Interesting day Monday. I wanted to start with a video from the highly accomplished Niall Ferguson. This is a must watch so please take the time to watch it in its entirety:

My Take:

This was a great video on the reality of what we are facing as a nation. The best take-home point from this is where Niall brilliantly discusses the bond market and our rapidly increasing debt loads.

The perception of the bulls is that low rates and easy money will eventually get us out of this mess. What Niall counters with here is a mathematical reality check in regards to the sheer magnitude of the amount of debt we are issuing and the cost to service it. The USA's ability to service our Treasury debt is mathematically impossible if we continue to sell $120 billion in treasuries every other week.

As Niall describes, when the debt loads become so large, it only takes a small increase in rates to create a fiscal crisis because you become overwhelmed by the huge amount of debt issuances that you need to service. For example: Increasing interest rates by 2% on bonds with the overwhelming amount of debt we have today might be the equivalent of taking rates to 8-10% in the early 1980's when it comes to the percentage of GDP it will cost us to service the debt (pay interest on the debt).

The bond market will eventually call the Fed out by taking rates higher as they begin to realize that our GDP will simply not be large enough to service the debt.

Will the PIIGS and the rest of Europe get called out before us? Sure, but eventually we will end up in the same place; our situation is no better. We get a pass for now because we are still considered to be the safest haven left. Or as I like to say: The best of the worst!

This is all unsustainable and I think the reality is beginning to set in that we cannot continue to spend like this. Anyone that has a job and pays bills understands that you cannot spend more than you bring in every month over a long period of time without going bankrupt.

The problem we have here is the political will is not there to make painful decisions we need to make in order to clean up our fiscal house. It's going to take a fiscal crisis similar to Greece in order to finally force the government to clean up its balance sheet..

The fact that Niall predicts this will likely happen within 2 years is a pretty alarming statement.

The Bottom Line

We saw a nasty reversal in the markets Monday. I think the market realized by the end of the day that the Yuan devaluation was a big nothing-burger. The markets tried to pump the news and failed miserably.

Tuesday's action should be interesting. We have the G-20 coming up here soon and Germany seems to be pumping fiscal restraint, whereas we are still promoting throwing money out of helicopters. It will be interesting to see how this plays out.

Folks: The jig is about up. The Ponzi scheme is on its last legs. The borrowing path we have chosen is proving to be mathematically unsustainable. Greece went down via the same route. England and Japan are right behind them.

The question is now WHEN, not IF.

When accomplished people like Niall Ferguson are confident enough in their thesis to put time lines on the collapse, it's time to be afraid.

Disclosure: No new positions at the time of publication