Will America be another Greece?

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I am a professional investor with over 40 years of investment experience on a global basis and I have watched the deterioration of both United States and Greece. I believe there are some scary parallels between the two nations that should give us great concern about the long-term survival of America.

{mosads}One measure of the financial health of a country is the ratio of the debt to gross domestic product (GDP). Simply stated, it is the percentage of what we owe compared to everything we produce in our economy. The more you borrow as a percentage of your economy, the more difficult it is to service your debt and grow your country. Greece has a serious problem: their debt to GDP ratio is 177.1 percent. This means that the government is borrowing 77.1 percent more than everything that happens in the Greek economy. That encompasses all exports, everything that goes on within the country — wages, salaries, corporate profits — everything. They are spending 77 cents more than every euro they bring in to the government.

Currently, the United States has a debt to GDP ratio of 101 percent. In 2009, when President Obama took office, the ratio was 76 percent, which means we had income greater than debt. The current debt outstanding in the United States is in excess of $18 trillion and growing.

When we look at entitlements and couple it with debt service, the United States is currently spending 66 percent of its total budget on entitlements and 6.2 percent on interest expense, for total of 72.2 percent. On the other hand, Greece spends 56 percent of its budget on entitlements and interest expense.

There is one myth I do need to clear up. Our federal budget runs at a significant deficit to the point where, on average, we must finance approximately 40 percent of our operating budget. Many people believe that China is the largest purchaser of U.S. debt; if the Congressional Budget Office (CBO) can be believed, then that statement is not true. The largest purchaser of U.S. debt is the Social Security Administration. We are selling the lion’s share of our death to ourselves, so not only is the Social Security trust fund in trouble, further expansion of the debt to GDP ratio approaching that of Greece may find that the Social Security fund could be holding worthless securities.

Over the past weekend, the Greek government announced that it was closing the banks, limiting the withdrawals from ATM machines to 60 euros and putting in capital controls that limit the exportation of money and assets out of the country. We saw this same activity happen in Cyprus; the country could not pay its debt and so it closed the banks, put in currency controls and took up to 60 percent of the bank deposits from citizens to pay the loans, thereby avoiding default.

It is possible that the Greek citizens who have deposits in Greek banks may find up to 60 percent of their deposits being taken by the government to satisfy creditors who hold government debt.

We may well be on the verge of an interest rate increase later this year or early next year; with the ever-increasing debt issuance by the United States, the interest expense will rise and push the debt to GDP ratio well north of 100 percent. The lack of economic growth and the expanding issuance of debt has put many countries in financial jeopardy, including the United States.

If we continue to have an underperforming economy and further expansion of the debt, we could reach a point of no return. If the second-largest economy in the world finds itself in a position where it cannot service its debt and stop the spiraling increase in the debt to GDP ratio, we could be in serious trouble.

I realize that there are a lot of numbers that may be difficult to follow for the average American. I wrote this article because I think it’s important to try and help the American people understand that we’re stuck on the railroad tracks, the engine won’t start and there’s a great big train barreling down on us.

Perkins is a Registered Investment Adviser with over 40 years of experience in managing money for clients in a private practice. Perkins has invested money on a global basis and has studied interest rates and bonds in economies throughout the world.

Tags Debt Government debt Greece Gross domestic product United States public debt
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