Americans could be in for a rude awakening in coming months when they discover the true scope of the massive national debt racked up by the U.S. government. In fact, the $1.6 trillion deficit expected for 2010, which is above 10% of gross domestic product (GDP), is only the beginning. Since the current economic crisis began in late 2007, the U.S. Federal Reserve has tripled the size of its balance sheet, creating enormous amounts of new money by lending to hundreds of ailing banks and buying up more than $1 trillion of questionable asset-backed securities. But that's only a small part of the story. Since the beginning of the crisis, the Fed has lent, spent, or guaranteed $11.6 trillion, including underwriting the entire system of mortgage finance in the United States, a system that currently shows a nearly $1 trillion loss. And none of these figures include any of U.S. President Barack Obama's stimulus packages, which means the actual deficit next year might grow to $2 trillion - around 15% of GDP. "What a good country or a good squirrel should be doing is stashing away nuts for the winter," William H. Gross, managing director of the giant bond-management firm Pimco Group, told The New York Times. "The United States is not only not saving nuts, it's eating the ones left over from the last winter." The ramifications of this debt, which is bound to grow larger, will have a profound effect on investors - not the least of which is the imminent decline of the dollar. The Spiraling National Debt Right now, without counting future unfunded liabilities like Social Security or Medicare, our national debt tops $12 trillion. There are roughly 100 million American households. That's a national debt of roughly $120,000 per family. In order to keep the government functioning, Congress just increased the federal debt ceiling to $12.5 trillion. And the party isn't over yet. In an effort to keep mortgage interest rates low, the Fed pledged this month to buy yet another $500 billion of Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) guaranteed mortgage securities. But all that spending has a price. And the bill is about to come due. The White House estimates that the government will have to borrow about $3.5 trillion more over the next three years. On top of that, the U.S. Treasury has to refinance, or roll over, a huge amount of short-term debt that was issued during the financial crisis. Treasury officials estimate that about 36% of the government's marketable debt - about $1.6 trillion will mature in the next 12 months. That leaves the government in the same undesirable position as a lot of people who took out adjustable rate mortgages (ARMs) - forced to refinance short-term debt at higher interest rates for the long term. "The government is on teaser rates," Robert Bixby, executive director of The Concord Coalition, a nonpartisan group that advocates lower deficits, told The Times. "We're taking out a huge mortgage right now, but we won't feel the pain until later." The United States will spend almost $400 billion on interest to service our existing national debt. Currently, the United States takes in roughly $2 trillion in taxes, half of which come from income taxes. So the interest on our debt is already consuming 20% of all tax receipts, or 40% of all income taxes. The White House estimates that the government's tab for servicing the debt will exceed $700 billion a year in 2019, even if annual budget deficits shrink drastically. Other forecasters say the figure could be much higher. To amplify that figure, an additional $500 billion a year in interest expense would total more than the combined federal budgets this year for education, energy, homeland security and the wars in Iraq and Afghanistan, according to The Times. Then, there's the cost of the health insurance legislation and the potential cost required to reform Social Security and Medicare. As noted last week in Money Morning's Martin Hutchinson , the healthcare bill alone will significantly increase federal healthcare spending by about $185 billion in 2019, according to the Congressional Budget Office (CBO). It will also involve about a $100 billion increase in taxes by in 2019, the CBO said. And even though the bill relies on slashing Medicare growth for funding, "it is unclear whether such a reduction in the (Medicare) growth rate could be achieved." And who knows how much the bill could really cost. "No one (in Congress) can explain to me what's in the bill, and for Congress to vote on a bill that they don't understand whatsoever, you got to question...what kind of government we have," New York Mayor Michael Bloomberg told The Huffington Post. Americans have now doubled down on debt. The government's debt has almost doubled in the last two years alone, as Americans' personal wealth sank along with housing and stock prices. So where will the money come from? Total domestic savings in the United States are only around $600 billion annually. If we all put every penny of our savings into U.S. Treasury debt, we're still going to come up nearly $3 trillion short. All this debt might not constitute a crisis if the United States were still financing its own debt. But the United States has been a net debtor to the world since 1985. And today, foreigners own 44% of all the country's short-term debt, or about $880 billion. Since the expansion of the Fed's balance sheet got started in earnest last fall, the value of the dollar has fallen about 15%. The faster the money supply grows, the more likely the value of the dollar will continue to fall. It seems highly unlikely the level of deficit spending can continue without sparking a run on the dollar as foreign governments begin to sell U.S. Treasury bonds. The only real question is at what point U.S. creditors will finally decide they can't finance any more of the nation's deficit spending because it's simply not worth the risk. China has routinely called on the United States to rein in its soaring budget deficit and spare the dollar any further losses. "We have lent a huge amount of money to the United States," Chinese Premier Wen Jiabao said earlier this year. "Of course we are concerned about the safety of our assets. To be honest, I am definitely a little bit worried. I request the United States to maintain its good credit, to honor its promises and to guarantee the safety of China's assets." As an alternative to U.S. debt China has already begun the process of diversifying its reserve holdings away from the dollar. And China isn't alone, other emerging markets are going the same route. "It's time to sell U.S. Treasuries," Kim Heeseok, the head of investments for South Korea's government pension service, recently told Bloomberg News, Similarly, to protect their nest eggs, investors will have to be very good at managing their assets. Fortunately, there are several ways for investors to protect themselves Goldman Sachs Group Inc.'s (NYSE: GS) London economic team recommends going long the "BRIC" markets of Brazil, Russia, India and China, while going short equity indexes of the G-7 nations, including the United States. http://moneymorning.com/2009/12/30/u.s.-debt/
This is the End. Debt Implosion. We'll get a dollar crash. Followed by a brief 12-18 month stint of massive inflation (+30%). Then, severe deflation + job losses. Only way we get sustained hyper inflation is if the Government prints (and spends) many multiples of private borrowing. The preponderance of money supply is private borrowing. When the dollar goes to shit and inflation hits, new levels of real debt taken will plummet as jobs vanish = deflation. US Government will have to print and spend Trillions to make it a sustained hyper-inflation scenario. Possible, but unlikely. This credit bubble has been in the works since the 60's, without a decent purge. Home and stocks appreciating 7-10%, pa, for decades ?! It's bullshit. Hot-air and cheap money inflated our asset base into the stratosphere. On the other side, national income is rapidly eroding thanks to deindustrialization, taxes, over-regulations and cap-n-trade. Look at America's biggest growth industry - F.I.R.E. Financial, Insurance, Real Estate. 20%+ of GDP. It's a total ponzi scheme. What happens when half our national debt refinances at 300 basis points higher than current ? When the whole scam implodes ala Madoff, when new debt taken can't support the horrendous load already committed too, well, it'll get bloody. After much consideration, I firmly believe this. No fear-mongering or grandstanding.
This whole chicken-little thing is so overblown. The only thing I can come up with is that those that think this is worse than it is is due to lack of experience or understanding.
it is quite the opposite. the dollar will strengthen as the the other G8 nations have much bigger problems in their current accounts, which will trigger a flow to USD assets. we've already seen deflation in the last two years and now will get move to an inflationary environment with the fed raising rates at the end of this year, as a signal a major multi year policy shift. obviously, no more job losses, the economy will be a full speed by 2011, 2012. we could be entering a rosy decade for the USA and the rest of world.
You drink the Kool-Aid. Somebody has to. This is a good thing, if not, nobody would have bought my overvalued stocks when I sold.
I think the more debt the higher the markets move and the better off the economy is, I mean it seems no one has a single worry or care in the world how high debt levels go, if they did there would be decisions being made now to reduce the deficit, however all they are doing is trying to raise the debt ceiling. Should be close to $14 Trillion by the end of 2010. The greatest economies run on massive debt, that's what it looks like anyways.
I somewhat agree with this statement, because companies out there have become so lean and mean that the only way we're going to see significantly more job losses is for more companies to begin going out of business. However, don't expect to see hiring any time soon. These companies have learned to live on the headcount they have, without expanding. So those millions that are unemployed will remain so until a time (if ever) when government subsidy unemployment insurance runs out. But expansion? I really don't think so. There's really no way for any of this to end but really, really badly.
No offense S2007S, but that's a pretty naive stance to take. If normal inflation won't take America out Germany style then the Chinese or anyone else they are borrowing from will. The simple fact is America is broke and they've been trying to act like they're the all powerful nation for years but now the other countries are getting sick of it. That trillion dollar debt number isn't going to go away without blood, pure and simple.
The situation reminds me of living in south Texas and watching a blue norther approach. It's coming. You can't stop it and you don't know how bad it will be.