National Debt

Why Should We Care about our National Debt?
Some argue that our national debt is not a problem any more than it is with individuals (as long as they keep the payments current, all is okay). Others say that any debt leaves us beholden to our lenders in a manner that will not serve our best interests as a nation. Who’s right? Well, 40 years from now (around 2048) if we do NOTHING to increase our spending further, we will only be able to afford servicing (making interest payments on) our national debt – that’s it. In other words, we will not be able to afford any government spending AT ALL besides these payments. That means no military, no social security, Medicare, no road maintenance, police, post office, etc. That means – anarchy. To pay for this over a generation, we would need to DOUBLE our taxes as they stood at the end of 2008.

What is our National Debt?
Our national debt is the sum of all the money we owe. As of 2008 we owe $8.7 trillion dollars to countries all over the world. Our total outstanding forecasted outlays (obligations now and into the future) amount to $53 trillion. That is about $175,000 per person in the US.

What is a Deficit?
A deficit occurs anytime expenses exceed income over a given time period, typically one year. For example, a trade deficit occurs when we import more than we export on an annual basis. It is an annual measurement (a snapshot) of how well off we are in a particular context. Most believe that if we are running a surplus, we are better off. If we are running a deficit, we are worse off. While this is obvious, some numbskulls will argue even this basic criterion; we will not. Our national debt is a combination of three deficits: a Federal Budget Deficit, a Savings Deficit and a Trade Deficit. Note that none of these debt measurements are surpluses – not even close.

Federal Budget Deficit
The Federal Budget is the sum of all US debt since creation of the nation. It is simply the difference between what the government takes in (taxes or the Federal Revenue) minus what it spends (Federal Spending). It is a deficit when spending is higher than income, hence the term Federal Budget Deficit. It is telling that this term has become a household word since the budget has become perpetually a deficit (35 deficits to five surpluses in the last 40 years).
Some economists argue that the nominal debt amount (the actual dollar amount) isn’t what’s important; it is better measured as a fraction of our total output. So they like to look at the percentage of debt as a ratio of debt divided by Gross Domestic Product (GDP). This point alone can be argued, but lets take it at face value for now. This debt ratio began at about 40% of the US economy. The Federal Budget Deficit has risen from $75 million in 1789 (when America began) to $8.7 trillion today. Note that this number hasn’t always risen. Rather it has been nearly paid off or down several times only to rise again. During the Great Depression it rose to 44%. During World War II it rose to 112% at $200 billion, yet relatively quickly dropped after the war back to about 47%. In 1980 it was about 30% at $909 billion. It exploded to 64% and $4.4 trillion in 1992 during the Cold War period of the 80’s and early 90’s. In 2008, the federal debt was $5.4 trillion. As of 2008 it is $10.7 trillion and the ratio stands at 66% of GDP. By the year 2040, out debt will stand at twice the amount it was at the end of World War II which will be around 244%. At that point, we will cease to exist as a nation.

Who’s the Culprit?
Earmarks are 1%. Allowing the Bush tax cuts to expire would provide 10%. The Iraq war is 3%. All the rest is Social Security and Medicare-related expenses. If the government had not raided the funds allocated for these programs, we would not be in this situation. Since the government has been stealing the money from your annual payments to finance other pet projects, the future of the country is now in peril.

The Savings Deficit
Americans now spend more than they earn. We have followed the bad example of our government and for the second time in history have amassed a savings deficit in 2008 (so we now spend or borrow more than we make). The last time this happened was during the Great Depression (1933). The savings rate (savings as a percentage of income) has fallen from 12.9% in the 1960’s to negative 3% in 2008.

The Trade Deficit
In 2007, China had the largest trade surplus in the world. And who was dead last of 224 countries? You guessed it, the USA. If you are buying more than you are selling, eventually your trading partners are going to own a lot of your wealth. Who are these countries? The top 5 are:

  • 1. China
    2. Oil producing countries (Saudi Arabia, etc.)
    3. Canada
    4. Mexico
    5. Japan

Consider the first two largest lenders. Is this sound public policy – to be indebted to our enemies? What about the net two – does NAFTA ring a bell?

Borrowing To Finance Public Debt
In the past, the government used to borrow 100% from its citizens to finance its debt (public debt) in the form of savings bonds. There was 0% foreign debt. Today, 45% of that debt is owed to foreign interests. What could go wrong? They could destroy our currency by selling off the debt to low bidders, sending our economy into a tailspin. It would cause inflation to soar and since we have a permanent trade deficit, we would likely never recover.

The Latest “Boom” Cycle Was Actually Debt
Since 1996, many politicians have said that America has “enjoyed unprecedented prosperity”. It turns out this was in fact debt that was disguised as growth! The country basically borrowed more money over many years, spent it all, and then claimed it to be "growth."

The Fiscal Disaster of 1913
In 1913, the budget debt ratio was 7%. This year saw the creation of the Federal Reserve by President Woodrow Wilson and the 16th Amendment (the income tax creation act). These two sinister laws created the situation we are in today. The Federal Reserve instituted the practice of fractional reserve banking, which insures that any way out of this financial mess will be much more painful and will require a devaluation of the US dollar. The 16th Amendment gave the government the right to tax a large percentage of the electorate’s income ensuring very large government spending (the birth of the perpetual “big government”).

The Bleak Future
Here are excerpts an article from the Washington Post on January 2, 2009:
WASHINGTON - With President-elect Barack Obama and congressional Democrats considering a massive spending package aimed at pulling the nation out of recession, the national debt is projected to jump by as much as $2 trillion this year, an unprecedented increase that could test the world's appetite for financing U.S. government spending.

For now, investors are frantically stuffing money into the relative safety of the U.S. Treasury, which has come to serve as the world's mattress in troubled times. Interest rates on Treasury bills have plummeted to historic lows, with some short-term investors literally giving the government money for free.

But about 40 percent of the debt held by private investors will mature in a year or less, according to Treasury officials. When those loans come due, the Treasury will have to borrow more money to repay them, even as it launches perhaps the most aggressive expansion of U.S. debt in modern history.

With the government planning to roll over its short-term loans into more stable, long-term securities, experts say investors are likely to demand a greater return on their money, saddling taxpayers with huge new interest payments for years to come. Some analysts also worry that foreign investors, the largest U.S. creditors, may prove unable to absorb the skyrocketing debt, undermining confidence in the United States as the bedrock of the global financial system.

While the current market for Treasurys is booming, it's unclear whether demand for debt can be sustained, said Lou Crandall, chief economist at Wrightson ICAP, which analyzes Treasury financing trends.

"There's a time bomb in there somewhere," Crandall said, "but we don't know exactly where on the calendar it's planted."

Congress is not planning to raise taxes or cut spending to cover the cost of those programs, because economists say doing so would further slow economic activity. That means the government has to borrow the money.

Some of the borrowing was done during the fiscal year that ended in September, when the Treasury added nearly $720 billion to the national debt. But the big borrowing binge will come during the current fiscal year, when the cost of the bailouts plus another stimulus package combined with slowing tax revenues will force the government to increase the debt by as much as $2 trillion to finance its obligations, according to a Treasury survey of bond dealers and other market analysts.

As of yesterday, the debt stood at nearly $10.7 trillion, of which about $4.3 trillion is owed to other government institutions, such as the Social Security trust fund. Debt held by private investors totals nearly $6.4 trillion, or a little over 40 percent of gross domestic product.

According to the most recent figures, foreign investors held about $3 trillion in U.S. debt at the end of October. China, which in October replaced Japan as the United States' largest creditor, has increased its holdings by 42 percent over the past year; Britain and the Caribbean banking countries more than doubled their holdings.

Economists from across the political spectrum have endorsed the idea of going deeper into debt to combat what many call the most dangerous economic conditions since the Great Depression.

"When you accumulate this amount of debt that we're moving into, it's not a given that our foreign friends are going to continue on the path they've been on," said G. William Hoagland, a longtime Republican budget analyst who now serves as vice president for public policy at the health insurer Cigna. "There's going to come a time when we can't even pay the interest on the money we've borrowed. That's default."

Despite their growing domestic needs, "China and the oil countries are going to continue running large surpluses," said C. Fred Bergsten, director of the Peterson Institute for International Economics. "They certainly will be using money elsewhere, but I don't think that means they won't give it to us."

Nearly a year ago, Moody's raised an alarm about the skyrocketing costs of Social Security and Medicare as the baby-boom generation retires, saying the resulting budget deficits could endanger the U.S. bond rating. Even as the nation sinks deeper into debt to finance its own economic recovery, several analysts said it will be critical for Obama to begin to address the looming costs of the entitlement programs and signal that he has no intention of letting the debt spiral out of control.

Failure to do so, Bergsten said, would "create dangers . . . in market psychology and continued confidence in the dollar.”

Most Americans don’t “save for a rainy day” because they have never seen a rainy day. Well folks, it’s coming. The impending utter collapse of funding sources for federal medical expenditures and Social Security programs alone guarantees that.