Where is the breakdown point?

The breakdown point is the percentage of national debt to GDP which is seen to be unacceptable by the financial community. To join the Euro, member states must show that their national debt has to be below 60% or fast approaching that level. This 60% is seen to be the sustainable ratio and Governments whose spending exceeds this ratio will be told to rein in thier spending. It would be interesting to see how many of the countries in Euro has national debts below the 60% level.

The same ratio in USA is 66%. The last time this level was reached was after World War 2 and money was needed for the rebuilding of Europe and Japan. After WW2, the only major developed country that was not bombed was the USA and so it was in a position to capitalise on the development of the bombed out countries. Today the world is competing on a global basis.

It seems governments throughout the world is in debt.The two Asian giants China and Japan has national debts . USA leads the charge followed by Europe and Asia. Only the oil rich countries have no national debts. China intends to spend $160 billion on the 2008 Olympics and need to spend even more to improve its infrastructure in the poorer provinces.

The problem is that there is no universal worldwide standard or agreement as to what level of debt is acceptable. Today banks have to have reserves that meet the capital adequacy ratio to protect them from potential financial crisis. Countries need to have a similiar capital adequacy ratio to protect them from over spending. The reserves would be kept in gold.

Indications of worry of excessive national debts can be seen in two indicators. Rising interest rates and gold prices. If investors see paper currencies as losing their value , they will want high interest rates to cover the risk of currency devaluations. The most obvious choice would be higher gold price . As national debts keep on rising, there will be a pulpable tension in the financial markets as everyone will be watching for the breakdown point. A lack of confidence in currencies could cause gold to spike to beyond the US$1,000 level.

What could cause this lack of confidence? A sudden disaster which would require billions to recover such as an earthquake in California or Tokyo. A tsunami in USA and Europe .Imagine Nice, Florida and the expensive resorts being hit be a tsunami. The cost of the tsunami in Asia is in human cost while the cost of the tsunami in Europe and USA will be more in economic costs. Imagine a tsunami several times more powerful than Hurricane Katrina.

Without a natural disaster, it will take another seven years for perhaps the national debt to exceed 100% of the GDP. No one can tell what this breakdown ratio is but perhaps 100% is a figure we can for now assume is the breakdown ratio. And when this happen buy gold and more gold!