Canada's Housing Bubble

For 220 years, through civil upheaval, global conflict and a depression, the United States largely kept its public debt under control.

But the world's largest economy may finally have met its match. In its bid to prevent the Great Recession from spiralling into a global depression, the U.S. government spent tens of billions rescuing financial institutions and automotive companies. In the process, the federal budget deficit swelled 220 per cent from 2008 to a record $1.6-trillion (U.S.).

The world's biggest economy has plenty of company: Seven of the members of the Group of 20 nations are on a trajectory that will leave them with debts bigger than 75 per cent of their economies by 2014, according to the International Monetary Fund.

It's hard to understate the fiscal cost of the financial crisis, which continues to send shock waves around the world. This week's move by Dubai World, a state-owned conglomerate that fuelled the United Arab Emirates' rapid growth, to withhold debt payments shows the financial crisis continues to put government finances at risk.

Even in Canada, a relative paragon of fiscal prudence, the combined gross debt of the federal and provincial governments is on pace to reach 79 per cent of gross domestic product next year, compared with 64 per cent in 2007.

The numbers are staggering. But as the dust settles from the financial meltdown, policy makers are slowly coming to grips with the fact that a long battle with deficits and debt is only beginning.

The immediate threat posed by economic calamity allowed them to forget about a reality that's been staring them in the face for years: The baby boomers are about to blow the budget.

U.S. President Barack Obama is feeling the most pressure these days.

One of the reasons the U.S. dollar has slumped this year is that investors lack confidence that the President and Congress are up to the challenge of restraining a long-term fiscal crunch that makes reducing the current deficit look routine.

Consider this: If the U.S. government was to slip into neutral today, allowing Bush-era tax cuts to expire and inflation to push many of the middle class into higher tax brackets, the country's debt would climb to about 300 per cent of gross domestic product over the next seven decades, according to the Congressional Budget Office.

Tweak that forecast for the political and demographic reality – the extensions of many of those tax cuts and higher payments to doctors as the population ages – and the CBO's model predicts the debt-to-GDP ratio would approach an astonishing 800 per cent over the lifetime of an American born this year.