About That $20 Trillion in Public Debt....

Massive Federal deficits require higher taxes; ever-expanding public debt and higher debt service sets up a death spiral once new investment is crowded out by Federal borrowing.

In only three more years you're talking $20 trillion in public debt for the USA and a GDP going nowhere fast. And what does that look like in terms of the S&P 500? Courtesy of frequent contributor Chartist Friend from Pittsburgh, here is the SPX charted against total public debt. You'll notice it's crashing:

What this chart reflects is another aspect of the death spiral I described yesterday in The One Chart That Says It All: when depreciation outstrips new investment, then productivity, income and profit all decline. As interest on skyrocketing debt rises, then more income must be diverted to service debt, leaving less for new investment. That sets up a positive feedback loop, i.e. death spiral.

Here's how rising Federal debt creates a death spiral in the economy. As Federal debt skyrockets, the cost of debt service rises, even at super-low rates of interest. That means taxes must rise, because no constituency will allow its share of the Federal budget to decline by more than a symbolic amount. Higher taxes means there will be less money available for new investment, and the enormous sums of Federal debt that have to be sold crowds out other investment. Read More