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Sovereign Debt Panic

In a bid to goose their economies, governments are spending with abandon, and now — even before any appreciable effects have been realized — they suddenly realize that they have spent themselves into a corner. Now, wallowing in debt and with unprecedented debt-to-GDP ratios staring them in the face (see previous post), everyone is starting to panic. Privately at least, they are asking: What if we can’t pay off all this debt? I’ve made no secret of my belief that all that debt cannot be paid, because that would require some really hot economic growth worldwide, which in turn would necessitate a copious supply of cheap energy and resources.

So, it appears that panic is setting in. Japan is ready to implode, and deflation is proceeding apace. The US too is a basket case. And we all know about Greece and Spain. Spain has embarked on making huge cuts everywhere in a desperate effort to stop the bleeding. Greece’s situation is so critical that the IMF is on standby and says that Greece must slash its budget (this article says that this year Greece’s debt-to-GDP ratio will reach 120%, but that’s just sovereign debt). In the US, President Obama says that “it is critical that we rein in the budget deficits we’ve been accumulating for far too long.” You bet!

At Davos, “audience participants voted electronically, with 50.7% declaring sovereign debt to be the top candidate for the cause of the next global crisis.” That got by far the most votes.

And then there’s China. Everyone is raving about its economic growth, but China has been pumping up a really big bubble. If it deflates suddenly (good possibility), it will be more like an explosion than a pop. There is a colossal amount of non-performing real estate assets in China (vacancy rates in Shanghai’s Pudong district are as high as 50%), and a mountain of debt piled up because obviously real estate developers have borrowed heavily to build all those office buildings and condominiums.

So, amigos, it’s about time people started to panic. Keep a watch on the situation and have an emergency bag packed at all times.