The USA is headed for an inevitable Investor rebellion. The social engineering agenda of the Pelosi/Reid/Obama Democrats is on a path that would double today's $13-Trillion USA National Debt by 2022, and triple it by 2029. Already a staggering 105%, the ratio of National Debt to GDP is destined to cross the 200% threshold in 2029. Most buyers of US Treasuries are unaware of these precise numbers, but they have had a sense for a while that the realities of inevitable higher interest rates and compound interest will cause their eventually temporary withdrawal from the auctions ... to stage an intervention.
Left unimpeded, the rise in Debt interest, unfunded Social Security liabilities, Entitlements for Medicare/Medicaid and Universal Health Care would drive the National Debt to $73-Trillion over the next 30 years. This target was $55-Trillion at the end of the Bush era.
On the very short term, there appears to be some relief. Albeit the 2010 $1.5-Trillion Budget Deficit represents 12% of GDP, our analysis of CBO costing of the current Obama ten-year Budget indicates the ratio will decline to 5% by 2014. This virtually guarantees the stability of future Treasury sales to both domestic & international investors over the next 12 months.
Not so pretty is the journey from 2015 onwards wherein the Deficit/GDP ratio is currently scheduled to a rocket to a horrendous 17% by 2040. Somewhere along the way, Congress is likely to see the start of a shunning of Treasury sales ... precipitated by sharply higher yields. Inevitably, even the offering of higher discounts fails to yield sufficient monies and a matching of funds environment will prevail. In a diversionary strategy in play since February, Wall Street is engaged in faux outrage at the prospect of Greece's 13% Deficit/GDP ratio and finger-pointing at the PIIGS. Well, an unrestrained American Federal Gov't is on a path where it admits it will "again" pass today's 12% threshold in 2030. But next time it will not be a sanctioned spike, but rather a structural phenom with virtually no options for urgent corrective action.
The Pelosi-Reid-Obama Budget process has shone a light on the whole structural deficit issue that we've been raising awareness about for almost a decade. The foundations crosses several administrations. Hopefully, closer Media & think-tank scrutiny will spawn anticipatory action by a more fiscally responsible Congress. Hey, at least they formed a non=partisan committed in March! If not, current CBO data indicates that left unchecked, the annual Deficit rockets to $4.2-Trillion by 2040, $7-Trillion by 2050 & $23-Trillion by 2080. Meanwhile, the National Debt surges to $128-Trillion & $544-Trillion respectively by the latter two dates.
Gratefully, this "would/could/might" scenario is a mere academic exercise. If Congress fails to address this responsibly, most of the foreign and even some domestic players will simply withdraw and shun the Treasury Auctions that fund "the habit". The dark and ominous path illustrated will be truncated when these Investors sense the Federal Gov't is approaching tipping points where they deem it prudent to exit the venue.
Weighing the USA's situation amid the international community, TrendLines Research judges such a Debt Crisis will occur upon the National Debt reaching 140% of GDP ... likely in 2020. That's only ten years away. Even if the USA dodges that bullet by some fortune, a similar fate, via the Deficit Crisis, is also on the horizon ... when the annual Deficit again gets to 10% of GDP ... in 2026.
Clues to the proximity of another and almost inevitable American financial crisis are visible via the exchange rate of the USDollar. Distrust of Congress & the Administration in addressing their Deficit/Debt responsibilities began in January 2002. In the succeeding six years, the disfavoured currency fell 26% from its USA:EUR rate of 1.16. The secular decline was interrupted by safe haven seekers during Russia's incursion into Georgia & the Liquidity Crisis; but the trend resumed in March 2009. Mass withdrawal of foreign (and some domestic) buyers of Treasuries will be known to be imminent upon deterioration of the USA:EUR to inconceivable levels.
Wall Street has been sly in swaying scrutiny away from itself by presenting the red herrings of Argentina, Dubai-UAE, Greece, Ireland, Iceland, Spain, Hungary, Portugal & Italy. When they run out of new countries to finger-point, TrendLines Research is confident the renewed spotlight on USA fundamentals will guarantee a return of the secular decline of the USDollar.
Present trajectory suggests new lows for the Dollar will occur prior to the end of the decade. A more aggressive scenario (reflected via our Barrel Meter) predicts an accelerated version of this crisis, with the USDollar plunging to 0.64 by 2011Q4. Such a EURO spike would certainly act as a wake-up call for policy makers, and such a wake-up call should bring about immediate intervention strategies to initiate a prompt retreat.
On the positive side, the string of Export records seen in 2006/2007 should resurface in 2011 as importers see nicer prices. Manufacturing could also surprise when domestic consumers start to shun high priced foreign goods and associated ever increasing transportation costs of those products.
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Disclosure: no positions