President Obama handled his first State of the Union pretty well on Wednesday evening. But overhanging his ambitious agenda is a darkening cloud of debt as we were reminded Thursday when the senate voted to raise the nation’s debt limit by $1.9 trillion. The CBO director recently noted that debt held by the public totaled $7.5 trillion, or 53% of GDP, at the end of 2009. Of perhaps greater concern, this frightening percentage only looks to get worse. By the end of 2020 the debt is expected to climb to $15 trillion, or 67% of GDP. America is a resourceful country but these projections are beginning to look scary.
A good book making the rounds these days, ‘This Time Is Different’ by economists Carmen Reinhart and Kenneth Rogoff, adds greatly to the history of sovereign debt defaults with data going back more than 600 years (yes, the data get spotty). Their research offers a historical tapestry of sovereign defaults and related crises as common among countries and more frequent than one might guess, ranging from the “pronounced exchange rate instability during the Napoleonic wars,” to the effective default via inflation by the United States and Europe in the Seventies.
America’s enormous debt has consequences, says one money manager who stopped by my office on Thursday. Steve Romick manages the FPA Crescent fund, and was nominated by Morningstar as one of the best managers of the decade. He sees America’s debt burden driving up Government bond yields because, he believes, foreign buyers will demand it— not because they expect an outright default by the U.S. but because they know America’s way is the more subtle ‘inflation default’. Higher bond yields will be the first of many penalties Americans pay because we have allowed the nation’s debt to grow and grow. What’s Romick planning to buy as a defense against the debt threat? Farmland.
By the way, there’s no ticker symbol for dirt.