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The zombie apocalypse is coming.
That's according to Michael Pento, President of Pento Portfolio Strategies. But he's not talking about people or banks turning to lifeless monsters. He's talking about sovereign nations having the life sucked out of them.
Why? "Because they are saddled with so much debt," he tells the Daily Ticker's Aaron Task in the accompanying clip. "They are sucking the life blood of capitalism out of their economies and pouring them into the servicing of government debt; you cannot grow and therefore, you are a zombie nation."
The U.S. is currently vying for a spot within what he calls "the zombie club of nations" with a national debt nearing $15 trillion. But most notably these days, Pento is referring to Greece, which currently has a deadly debt-to-GDP ratio of 170% and is teetering on the brink of default.
What about the Greek bailout?
It doesn't matter, says Pento. Even if Greece decides to stay in the EU and take the bailout so kindly served up to it by other Eurozone countries last week, it is destined for the zombie club of nations, which should be noted began in Japan two decades ago. He calls the EU deal a "farce" because the country will likely not be able to lower its debt-to-GDP ratio to 120% by 2020 as required by the deal. And even if it does, that level of debt is more than the country can withstand, Pento says, while gesturing to Italy, which is going through a similar same scenario right now.
On top of that, other parts of the bailout are not so fortuitous. Someone has got to cover the cost of the deal and it will likely be Europe's middle class, Pento says.
For example, if Greece is relieved of 50% of its principal debt payments, it will be at the expense of bondholders who will take an equivalent 50% haircut on their investments. And someone has got to pay to beef up the entire European safety net from $600 trillion to $1.4 trillion — foreign investors could step in, but this is likely to be left up to the European Central Bank's (ECB). And should the ECB start up the printing presses, (This morning, new ECB President Mario Draghi cut the benchmark interest rate to 1.25% percent from 1.5%) that will only destroy the value the Euro and decrease the purchasing power of everyday Europeans.
But there are ways of making insolvent nations like Greece solvent again, says Pento. He cites two primary solutions, both of which will lead to economic malaise, but one less painful than the other.
#1 Quick, But Painful: Default and restructure the debt, which will likely lead to recession. (Pento's preference.)
#2 Drawn Out, And Really Painful: Nations can inflate their way to solvency, which could take a lot longer and put more pressure on the livelihoods of citizens.
The Zombie Club: Why the U.S. Could be Next
By the end of this year, U.S. debt is on track to account for nearly 70% of the country's economic output, according to Congressional Budget Office estimates.
But what is really worrisome is the fact that the U.S. is set to hit a debt-to-GDP ratio to 187% by 2035. Even if the super-committee can reach its Nov. 23 deadline by proposing $1.2 trillion to $1.5 trillion in spending cuts over the next 10 years, the U.S. debt-to-GPD ratio would only drop to 164% by 2035.
Earlier this week, former Congressional Budget Office director, Dr. Alice Rivlin sounded this alarm bell before in testimony before the Joint Select Committee on Deficit Reduction.
"To achieve success the committee will have to go well beyond the minimum charge of identifying of $1.2-$1.5 trillion in savings over the next ten years," he said. "Because even savings of this magnitude would leave the debt rising faster than the economy can grow."
If such changes are not made soon, here and abroad, "the developed nations are going to become zombies," says Pento.
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