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February 04, 2010

US Titanic

The Titanic was supposed to be unsinkable, but it sunk anyway because of a simple structural flaw.  There were numerous ballast tanks that were supposed to act like pillows of air to keep the ship afloat in the event the ship's hull was punctured.  Unfortunately, the builders of the Titanic decided to cut corners and save a little money on structural steel, so they only built the walls between the tanks 3/4 of the way to the top.  The result of this oversight was that when the iceberg pierced the Titanic's hull the water filled up one compartment and then spilled over into the next, and so on, until the ship upended and sank.

Our debt situation is like that.  Whatever ballast tanks of untapped credit we once had access to have been filling up and spilling over, one into the next to the point where we now have very little breathing space left.  Once the tank labeled National Debt is full, we will no longer be able to borrow and we'll have to start printing money instead. 

Based on Greece, Spain, Portugal and Japan, we are seeing that the capacity for sovereign borrowing is not unlimited.  We are learning that the the credit limit on sovereign debt is around 120% of GDP.  And what that means for America is that we have available credit of about 5 trillion dollars in the very last ballast tank that still has air.  And at a deficit burn rate of 1.5 trillion a year, that's about 3 years of cushion (without pricing in ANY additional stimulus).

No wonder there's so much fear out there. 

When are we going to realize that how we have been thinking as individuals translates into how we have been thinking as a nation.  As satisfying as it might feel to try to shift the blame, it isn't just the government that has been irresponsible with debt.  Yes, our nation is still making payments on the national debt for our participation in World War II, but Average Joes and Janes are still making payments on their credit cards for meals they ate 5 years ago, too.

Change people and you change the world.