I started decades ago thinking about the theme of (public) debt sustainability, with my homeland Venezuela in mind. Then, when I arrived to the World Bank as an Executive Director in 2002, I widened my perspective to include the public debts of developing countries in general.
And so I started this my unsustainable debt sustainability blog.
But now, because of my concerns with the distortions in the allocation of credit to the real economy, produced by the risk weighted capital requirements for banks, almost in shock, I find myself thinking on the debt sustainability of developed countries; including that of the US. And of course, that is scary.
Here are some of my uncoordinated recent thoughts (some tweets) on this whole issue.
Statist ultra low risk weights that for the purpose of capital requirements for banks are assigned to the sovereign, guarantees excessive public debt and places a reverse mortgage on its economy which is going to burden future generations.
In 1988, when statist regulators assigned it a 0% risk weight the US debt was $2.6 trillion. At the end of 2017 it was US$20.2 trillion, and still 0% risk weighted.
If it keeps on being 0% risk weighted, it is doomed to become 100% risky, just like what happened to Greece. But, any increase of that weight will scare markets out of their mind.
Very high US debt might hinder investments needed to assure its military superiority, and so, at the end of the day, it could come down to the question of: What is more important, having the strongest military forces in the world, or an AAA rating?
What if so many Americans with too much mortgage debt, car debt, student debt, credit card debt and whatever other debt, intuitively picked Trump because he is a guy who has gone through six bankruptcy processes, and has still ended on his feet, and on top?
What if Trump tweets: “They tell me US already has too much debt. With that debt we have written a reverse mortgage on our economy, which will burden too heavily the next generations of Americans. So, OK, I know a bit ‘bout that. I’ve been there, about six times. I'll get down to some good (Great) negotiations... right away!”
Would that be end of the world, or a much needed cleaning?
It would sure be a dangerous mess... but would not the mess be worse if waiting longer for it to mess itself up even more?
