The 10% Barrier-or-The Game’s End

Government issues debt securities to finance their massive budget deficits.  While this trend can persists for some time, the rate of increase can not go on forever.

There is a 10% barrier that governments pass at their own peril.  What this barrier says is that when interest payments on government debt  as percentage of general government revenues hits 10% or more the debt game is coming to an end.

Don’t underestimate this boundry.  The 10% barrier is crucial because as above this level, debt service costs will start to limit government’s options.  In other words as you get above this level, government’s ability to counter another recession or emergency will be limited.  

The United States will hit the 10% barrier by 2011-12 at current rates of debt expansion.  Moody’s Investment Services has alreay issued a stiff warning to both the U.S. and the U.K. that if this level is reached both countries  AAA credit rating will be lowered. 

The result will be higher interest rates over what would prevail with a AAA credit rating.  You can do the algebra on what this would do to both the residential and commercial real estate markets plus the whole economy.

Be Solvent & Prosperous,

Sanford Kahn, Business Author/Speaker