When the past takes over the present, the future is doomed…
“There are many ruins in a nation. »
–Adam Smith, Scottish philosopher and economist
Let’s see what Fortune has published :
“Wharton professor says $34 trillion debt could trigger collapse in 2025 as mortgage interest rates rise above 7%: ‘It could derail the next government.’
Among the illustrious plaques that adorn the offices of Ivy League business schools is a certain Joao Gomes. A professor of finance at Wharton Business School, Mr. Gomes is sounding a cry of alarm that many of his peers have so far chosen to ignore: the growing mountain of American public debt. »
The crux of Mr. Gomes’ warning is that the United States faces ruin due to its $34 trillion debt. The more current income is spent on past expenses, the less money is left for current expenses. And people who have less money to spend are poorer.
In the immediate future, the feds must borrow more and more money to pay interest on their $34 trillion debt and continue their excessive spending. They inevitably compete with private borrowers and drive up interest rates.
That ‘70s Show
Yesterday we looked back at the 1970s. In 1979, the going rate for a mortgage was 12.9%. Today, mortgage debt stands at $12 trillion. Much of this debt is fixed rate, at very low rates. Sales have dried up because, for sellers, it would mean taking out a new mortgage at much higher rates.
Adjusting to higher rates takes time. Already, the housing sector is no longer building as many houses as before, due to lack of being able to sell them. And buyers aren’t buying like before either, because they don’t have the means to do so. With a median price of $435,000 (up from $25,000 in 1970!), a 12.9% mortgage would mean monthly payments, interest only, of $4,676. The median household income is only about $6,000, which doesn’t leave much to live on.
Even at 7%, the mortgage payment (around $3,000/month) is higher than most people can afford.
It is very likely that property prices will fall as demand for expensive housing decreases. But mortgage interest rates will likely continue to rise as demand for credit continues to grow. At some point, probably next year according to Professor Gomes, a debt crisis will break out. The economy will run out of steam, sparkle… then go out like a damp flame.
We have been warning our readers about public debt, intermittently, for 50 years. This gives us some credibility in the doomsday industry. But most people think our clock has stopped. Half a century is “long term”. They assume that if nothing bad has happened in 50 years, nothing will happen at all.
Some graybeards remember the post-World War II experience. The debt-to-GDP ratio was as high then as it is today. But no disaster followed. On the contrary, the debt fell and the economy prospered.
No end in sight
Isn’t this likely to happen again? It’s very unlikely. The debt from World War II was of a different nature. It was entirely due to the war. Households and businesses, unable to buy anything, saved their money. By the end of the war, they had real money and were ready to spend, invest and build. After Japan surrendered, military spending plummeted and civilian spending skyrocketed.
Today the situation is almost the opposite. Consumers and businesses are also very indebted. And whatever “war” we are engaged in, there is no end in sight.
But all this takes time. You can boil an egg in three minutes. You can watch a movie in an hour and a half. But neither wine nor whiskey matures overnight. And Rome wasn’t destroyed in two weeks. You can see Halley’s Comet in the night sky and continue to watch for it. After a few years, you give up. The comet has gone into the dark universe, and will never be seen again. But you gave up too soon. It returns approximately every 75 years.
Even jumping out of a plane makes you feel like you’re suspended in mid-air…like time has stopped. And yet, no matter how long it takes, you will land eventually.
It took the United States 190 years to accumulate its first debt of $1 trillion. But now the “rush to ruin” begins, and time speeds up. The United States adds $1 trillion to its debt every few months. According to the latest projections, the national debt will reach 60,000 billion dollars in 2034. The interest burden would then be around 3,000 billion dollars. You reach for the safety cord. But there isn’t one. Insiders profit from federal spending…and they control Congress. No parachute is available.
One way or another, the past will get what it deserves.
Patience.
2024-03-06 11:16:57
#Ruins #debt
