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Marc Faber: The Next Crisis, Sovereign Debt

After every financial crisis there’s a sovereign debt crisis, Marc Faber says. Countries that borrowed too much during the boom times start struggling to pay their competitors back, and eventually some of them default.

The countries most likely to blow up this time around are the “PIIGS”: Portugal, Ireland, Italy, Greece, and Spain.  One ore more of them, Faber says, will likely default in the next couple of years. And, that could result in the death of the Euro currency.

Longer-term, Faber says, Japan and the US are in line for the same fate.

The US crisis won’t hit us this year or next year.  But within 5-10 years, the United States will be forced to quietly default on its debt, most likely by printing money and destroying the value of the currency.

The main problem comes down to two things: 1) ballooning debts and 2) future interest costs.

As these charts from Faber’s Gloom, Boom, And Doom Report show, in the past decade, the U.S. government’s total debt and liabilities have gone through the roof, especially when Fannie, Freddie, Medicare, and Social Security are taken into account.  This trend is unsustainable, and it will correct itself only through a rapid acceleration of economic growth and tax revenues, a new-found financial discipline, or a crisis–or a combination of all three.

The second problem is interest costs.  Right now, the government’s debt and deficits aren’t creating an undue burden because the government can borrow so cheaply.  Eventually, however, as the country’s financial situation gets weaker, interest rates will likely rise, and our interest costs will go through the roof.

According to Faber, our annual interest costs currently amount to 12% of the government’s tax revenue.  Within five years, Faber estimates, these costs will soar to 35% of tax revenue.  This will force the government to cut spending (unlikely) and/or frantically print money.

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