Monday, June 21, 2010

Niall Ferguson: US Fiscal Crisis Will Likely Occur Within 2 Years

Interesting day today. 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 shear 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 equivelant 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 placeour 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 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 their balance sheet..

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

The Bottom Line

We saw a nasty reversal in the markets today.  I think the market realized by the end of the day that the Yuan devaluation was a big nothingburger.  The markets tried to pump the news and failed miserably.

Tomorrow'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


getyourselfconnected said...

I had a few thoughts about all this today after reading Krugman lamenting possible "austerity" measures. As always, NOW is not the time to cut spending, we will do that LATER after a total recovery. Ok Paul, serious question, I think in the last 30 years the US has runa deficit in all but 2 years. When again will we be able to stop spending??

CT-Hilltopper said...

I was just wondering where Mr. Anonymous is, the guy who things everything is wonderful. We haven't heard much from him lately.

We won't do anything until it's far too late Get. Our politicians and the economists that they are listening to are far too stupid for that.

Just grab some popcorn, settle back, and enjoy, the show. We're only talking economic collapse, the end of the world as we know it, and possibly the end of our government.

That won't be very painful, will it?

Jeff said...


Futes are flat as a board. Gold down and treasuries are up despite a market selloff.

Bet the daytraders are getting their teeth kicked in on this


There are always anons that come on here and start

I take them with a grain of salt although I do like to spar with them now and then:)

Silas Marner said...


Is there a summary of what he said somewhere on the Net? I don't usually watch videos.


Jeff said...


He is interviewed all over the world and has been on CNBC several times.

I suggest that you go to CNBC and click on the video clips section and then search his name.

There is a nice archive of videos there. I listen to him quite freguently because I think he is one of the smartest guys in the room.

Best of luck.

Anonymous said...

china wont risk deflation. this is all smoke and mirrors for some other purpose.

flipdippy said...

We have separation of stage 3 boosters.

Seriously, the markets and the economy are completely independent of each other these days.

Daytrading is and always has been a loser's game. But there's still time to buy and hold. We'll remain disconnected even while Rome burns.

It's more of the same every day. The news gets more and more grim, the facts more difficult to ignore, but the market just does whatever its masters want. For now, that's flat. Although I think we still have one giant (but doomed) reflation effort in front of us.

They can't just let the ship go down Jeff, they'll go down swinging and sacrifice our futures for it, no?

Jeff said...


They are about out of swings in my view.

You are right though: For now the market does not reflect whats actually going on in the economy.

However, history also shows it that eventually the fundementals do matter. The market will eventually get it and we will see something similiar to the tech crash.

I wouldn't buy and hold here bud. The 20% upside is not worth the risk of the 74% downside we face when the music stops.

Thats just my opinion though. I would be playing small here man if I were you. Very dangerous market.