An Ominous Picture

June 9, 2006 – Michael Hodges is the publisher of the Grandfather Economic Report. His very informative website http://mwhodges.home.att.net/ states somberly: “Each generation hopes their children will have more freedom and economic opportunity. Certain trends threaten their future.” One of those dangerous trends can be seen in the following chart.

This chart shows the relationship between America’s debt and its national income. Of significance is the meteoric rise in debt and the resulting widening gap compared to income. This trend is alarming.

Debts need to be serviced, meaning they require the ongoing payment of interest and repayment of principal. To service debt, the requirement for the aggregate debt of a country is no different from that owed by an individual. Both need income. Without sufficient income to provide the required cash-flow, the debt burden becomes unmanageable.

The widening gap on the above chart suggests the debt burden is rapidly becoming unmanageable. Indeed, it may have already passed the point where the debt can be reasonably serviced from available cash-flow, but the tipping point can only be identified after the fact. For example, only after the Asian currency crisis exploded in 1997 did it become clear that several countries in Asia could not service their debts. Economic and monetary turmoil was the result.

Consequently, it seems prudent to ask whether the next monetary upheaval will be an American currency crisis. The above chart doesn’t provide any answers, but the trend is indeed ominous.