We're Sliding Fast and No End in Sight

Deflation, high unemployment, steep global austerity, unsustainable debt, rising borrowing costs and you have a recipe for significant financial disaster and major social unrest.  Not surprisingly, it is happening in many parts of the world and eventually it will engulf America.  What is happening in Greece is a microcosm of what many other developed countries will be facing in the very near future.  Nearly all developed countries inflated their economic growth over the past 30 years by borrowing excessively on the good faith and promise of their people.

In the U.S., by 2015 our federal debt load is projected to approach $20 trillion dollars and be 133% of GDP.  By comparison, Greece's debt is already above the 120% threshold of GDP, considered by most economists to be unsustainable, and that is after factoring in a 50% "haircut" that current Greek bondholders will need to take to avoid a bankruptcy type failure.  Today, Italian bond yields exceeded the 7% benchmark many consider too high to be sustainable.  The same held true for Ireland, Portugal and others.

Fast forward to the U.S. in 2015 and what will high borrowing costs due to this country:  because Mr. Bernanke's attempt to print money substantially pales in comparison to the deflationary impact upon all asset classes worldwide, we will see a period of high interest rates in the U.S. with NO inflationary pressure to offset some of the financial pain yet to be endured.  Yes, interest rates can rise without inflation and it's called credit risk.  Credit risk is an investors required incremental rate of return to compensate for the fear of default or being repaid in an amount less than the original principal.  Credit risk is what is driving those bond yields up in Greece, Italy, Ireland and the like to unsustainable levels. 

This is not the 1970's again when interest rates shot to 18% and housing prices followed suit because of the oil embargo and the inflationary aftermath.  Quite the contrary, this will be the time when housing prices continue to decline worldwide as this massive deleveraging takes place and homebuyers find it even more difficult to qualify for purchases with higher loan rates.  The world is not going to keep lending America cheap money forever especially if we continue on our path of debt overload, which we are and there is no end in sight.