What happens when countries score a perfect 100% ? By that we mean achieve public debt to GDP ratios of 100% (yes, that’s a bad thing). It happened in Canada and in Sweden in the 1990s. Because it is coming to the US within the next 10 years, let’s see what happened and how they (Canada & Sweden) dug themselves out…

First, before any of you fret that Canada or Sweden may have seen their national hockey teams become uncompetitive during this time of crisis, rest assured they remained much stronger than their currencies.

OK, now really…. First the bond ratings agencies (Moodys, S&P, Fitch) downgraded ratings on sovereign debt (bonds). Immediately the central bankers step-in to calm down bond investors by raising interest rates. This makes new debt issuance more expensive and painful (rightfully so). This means more of the federal budget went to unconstructive things like interest payments on the national debt. The 1990s were largely not much fun in Canada.

Both countries raised interest rates but saw their dollar decline in value against trading partners. Both countries raised taxes AND cut federal programs/ spending (or put spending restraints in place). In both cases, the societies lived through relative austere times and came out the other side after a decade or so.

The US dollar is still the global reserve currency, so we’ll always get a good deal on our interest rates. But as we approach 100% public debt to GDP we are going to be forced to make choices among a suite of bad options. The Swedes and Canadians did not have that free-lunch low interest rate benefit that we have here. But the bad news is neither the Swedes nor the Canadians had seen:

• A real estate bubble like we’ve seen in the US

• Private / personal debt levels explode

• The worst global economy in many decades.

Some of you will counter argue that since Japan (worlds 2nd largest economy) has not seen catastrophe with a debt to GDP of 230% (right now), so why should we worry. Point taken. Here’s why : Japan owes all that money to its own citizens. Plus these citizens have very little personal debt. World of difference.