The Developed World Will Default on Its Debt: Opinion

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK ( TheStreet) -- There are three primary factors that determine the interest rate a nation must pay to service its debt in the long term: the currency, inflation and credit risks of holding the sovereign debt.

All three of those factors are very closely interrelated. Even though the central bank can exercise tremendous influence in the short run, the free market ultimately decides whether the nation has the ability to adequately finance its obligations and how high interest rates will go.
The Federal Reserve

An extremely high debt-to-GDP level, which elevates the country's credit risk, inevitably leads to massive money printing by the central bank. That, in turn, causes the nation's currency to fall and increases the rate of inflation.

It is true that a country never has to pay back all of its outstanding debt.

However, it is imperative that investors in the nation's sovereign debt always maintain the confidence that it has the ability to do so.

History has proven that once the debt-to-GDP ratio reaches about 100%, economic growth grinds to a halt.

The problem is that the debt continues to accumulate without a commensurate increase in the tax base. Once the tax base can no longer adequately support the debt, interest rates rise sharply.

Europe's southern periphery, along with Ireland, has hit the interest rate wall. International investors have abandoned their faith in the bond market, and these countries have now been placed on the life support of the European Central Bank. Without continuous intervention of the ECB into the bond market, yields will inexorably rise.

The U.S. faces a similar fate. Our debt is a staggering 700% of income. And our annual deficit is more than 50% of federal revenue.

Imagine your annual salary is $100,000 and you owe the bank a whopping $700,000. Then you tell your banker you are adding $50,000 each year -- half of your entire salary -- to your accumulated debt.

After picking themselves off the floor, your bankers would summarily cut up your credit cards and remove any and all existing lines of future credit.