Limits of Spending

Since politicians tend to see it as their duty to protect financial benefactors regardless of the expense to ordinary taxpayers, we can anticipate no end to corporate bailouts—using the justification that they perform an essential public service (such as investment banking) that could not easily be replaced by a new company if the firm were allowed to follow its natural course to bankruptcy.

Since our government is showing no self-restraint and will likely continue the bailouts for as long as it can, the question that has been on my mind lately is: how long can it? It cannot raise taxes to 100%, in fact it is already politically problematic, in California at least, to raise taxes higher than where they currently are.

So the federal government can keep selling treasury bonds. For now, the market in U.S. treasury bonds is good, but eventually distrust in the government's ability to repay debt will drive borrowing costs higher and investors elsewhere. Other countries, like Greece, Mexico, and Argentina, are starting to reach their terminal limits of borrowing, so I've been watching for patterns that define the limits of investor interest.

The Debt-to-GDP ratio is a commonly cited figure that indicates the creditworthiness of a nation. Public debt-to-tax revenues is an alternate measure I've been eyeballing. It seems that should be the bottom line: how much you owe vs. what your income is. But even there, no compelling patterns have emerged. Japan is about as much in debt as anywhere and its government can still finance itself, and the U.S. debt-to-taxes ratio is as high if not higher than countries now being downgraded.

I plan to keep watching the international financial news, and as more countries join the list of credit downgrades, hopefully stronger signal patterns will begin to emerge.