Spellman: U.S. Sovereign Default a Real Possibility
It doesn’t take an expert to know that the global economy is in serious trouble. But in order to gain an understanding of the domino effect that can lead nations toward financial collapse, having an expert on hand certainly helps.
Professor of Finance Lewis Spellman explained how massive government deficits trigger shockwaves that can be felt across the globe in a webinar on Jan. 10, 2012, titled, “Is a Sovereign Default an Earth-Shaking Experience?”
During his in-depth presentation, Spellman looked at past defaults (Greece was the first nation to default in 377 B.C.) as well as the current situation in Europe to give an idea of what may be in store here in the United States.
So far, we have been fortunate. “It’s something that the U.S. has never had to contemplate, in that it’s not in our personal experiences as U.S. citizens,” Spellman said.
However, Spellman explained that with cumulative U.S. government deficits about equal to our gross domestic product, it’s a possibility we need to consider.
“What matters is not the cumulative size of the number, but the size of the number relative to the income stream to service the debt,” Spellman said, adding that we are at a significant tipping point.
“Once you get into the debt disintegration phase, the costs of operating the government and making its commitments cause the debt to leap relative to GDP,” Spellman said.
Unlike household budgets, where reducing spending and eliminating debt can be a positive for a family’s long-term financial health, at the national level, tightening the budget can have harmful consequences, Spellman said. When the government sheds debt, “we as private wealth owners then take the hit,” he said. That’s why, Spellman explained, we need income growth.
That leads to a key question: “In today’s environment can we do anything to lever up growth?” Spellman asked.
For more of Spellman’s economic insights, along with a slideshow from his presentation, click the Listen Now! Tab on the McCombs Alumni Network “Lifelong Learning” website.