Clem Sunter

What's in a trillion? Lots!

2011-08-10 13:00

Clem Sunter

Every newspaper talks breezily about how many trillion dollars have been wiped off global stock markets whenever markets crash. The debt ceiling in America has just been raised to nearly $17 trillion which is a trifle higher than America’s current GDP. Their existing budget deficit if you deduct government expenditure from all the taxes they collect is around $1.4 trillion. In other words, they are still in a net borrowing as opposed to a net repayment mode.

Let me give you a feel, therefore, of what a trillion really means. There are nearly 32 million seconds in a year which translates into 32 billion seconds in 1 000 years and 32 trillion seconds in a billion years. Assuming no interest on the debt, to pay off the projected US debt at $1 a second or $32m a year – which would stretch the pocket of even Bill Gates – would take a period of 17 trillion seconds which is roughly 531 000 years. Not much was happening on our planet that long ago; and, in over 500 000 years' time, we will need to have adapted to living in a microwave oven on the assumption that the climate change experts are correct.

Furthermore, if you add in interest payable on the loan of say 2% per annum, the magic of compounding has to be figured into the equation. For starters, 2% of $17 trillion is a mere $340bn in the first year. This has to be added to the $32m repayment to create a sum which is way beyond Bill Gates or even most countries to service. Moreover, should you miss out on repayments of interest and capital, the total amount doubles every 35 years meaning that you could owe $34 trillion before the middle of this century in the event of habitual default.

These fantastic amounts should convince you about two things. Firstly, Americans must believe in an unbounded universe to have borrowed so much money and feel that they do not have to quit as long as there is more credit available. You have to be a debt junkie to get to $17 trillion or $57 000 per capita and keep your hand out. Secondly, the Chinese and other leaders must believe that America is too big to fail to close their eyes, lend more and to be prepared to accept lower interest rates as well. Risk is obviously not a consideration even when a major ratings agency has downgraded the quality of the securities already in your possession. Cloud cuckoo land is a phrase that comes to mind for all players involved (other than the ratings agency).

What I find equally amazing is that none of the market experts or the political gurus on the global TV networks has recognised the enormity of the problem that America faces in getting its financial house in order. The idea that a weekend's worth of negotiation between the US President and selected Republican and Democratic congressmen would provide a solution is truly ludicrous. In fact, the outcome is exactly what I thought it would be. My favourite scenario two weeks ago was "Kick the Can", namely put off any really dramatic moves in the hope that the problem will somehow disappear. The grand compromise was just that.

Of course, the size of the problem can be diminished through economic growth or inflation – the former being a virtuous solution and the latter being a dreadful one. I just hope that the superficial handling of the issue so far does not lead to the latter outcome, whereby all those who have shown some thrift and saved their capital for a rainy day end up being financially ruined by an inflationary tsunami, created by Western overindulgence. The probability of this scenario has just gone up a notch or two with the downgrading of US treasuries and the jump in the gold price.

Hence, the resolution of this crisis and the avoidance of a second financial crash will involve enormous pain whether you follow the virtuous route of austerity in meeting the challenge of spending money you have actually got; or whether you go down the debt-driven path to inflationary hell. Remember, though, 531 000 years is an extraordinarily long time at a dollar a second! You should not let $17 trillion roll off the tongue so easily in the future. According to the song, it used to be a dime that buddy asked you to spare. Now it’s much more.

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