Last week one of the US big city Detroit is raising red
flags about other major U.S. cities also dealing with billions in under-funded
retiree benefits, prompting the question -- who might be next? But big
question which no one likes to talk is US as a country debt which going to
increase around 4 trillion USD this year.
When you add maturing debt to the new debt that the federal
government is accumulating, the total is quite eye catching. You see, the
truth is that the U.S. government must not only borrow enough money to fund
government spending for this year, it must also “roll over” existing debt that
has reached maturity. Of course the government never actually pays any of
that debt off. Instead, it essentially takes out new debts to cover the
old ones. So the U.S. government is actually borrowing far more money
each year than most Americans realize. For fiscal year 2013, the U.S.
budget deficit will be about $845 billion, but on top of that the
government will also have to borrow about 3 trillion dollars to pay
off old debt that is maturing. Overall, the U.S. government will borrow
close to 4 trillion dollars this year, and that number will likely be even
higher next year. That is not going to cause a crisis as long as interest
rates stay super low, but if interest rates begin to rise substantially,
the game will change dramatically.
Debt needs to be paid back someday:
When the government borrows money, it has to pay it back
someday. Back in the old days, the federal government used to issue lots
of debt that would not mature for a very long time. But in recent
years things have been very different…
In order
to fund the government, the Treasury Department periodically auctions Treasury
securities with various maturities ranging from 30-day Treasury bills to
30-year Treasury bonds, with 2-3-5-7-year and 10-year Treasury notes in
between. It used to be that the bulk of Treasury borrowing was done in the
longer-term instruments with maturities of at least 10 years.
In more
recent years, however, this trend has shifted more toward shorter-term Treasury
securities. There are pros and cons to both strategies. Generally speaking, the
shorter maturities are considered more risky since short-term interest rates
can vary frequently. Shorter-term maturities obviously have to be rolled over
much more often. That raises the risk that there might not be enough buyers when
the government needs them.
At this point, the average maturity of outstanding government
debt is only 65 months, and only about 10 percent of all Treasury debt
matures outside of a decade.
So what does that mean?
It means that the federal government must constantly roll over
massive amounts of debt. Once again, this is not too much of a problem as
long as interest rates stay super low, but as John Cochrane pointed
out, if rates start rising back to “normal” levels things could get quite hairy
very quickly…
Here’s
the nightmare scenario: Suppose that four years from now, interest rates rise 5
percent, i.e. back to normal, and the US has $20 trillion outstanding. Interest
costs alone will rise $1 trillion (5% of $20 trillion) – doubling already
unsustainable deficits! This is what happened to Italy, Spain, and Portugal.
Don’t think it can’t happen to us. It’s even more likely, because fear of
inflation – which did not hit them, since they are on the Euro – can hit us.
Sadly, those running things appears to be quite clueless.
For example, retiring U.S. Representative Michele Bachmann recently asked
Federal Reserve Chairman Ben Bernanke why the national debt has remained frozen
in place for 56 straight days even though we have been borrowing lots of money.
Bernanke seemed to have no idea how to answer that question…
As
Federal Reserve Chairman Ben Bernanke testified before the House Financial
Services Committee Wednesday, Bachmann asked how there could be no increase
reported in the total debt when the government is racking up about $4
billion a day in new debt.
“After
nearly 10 years as the head of the Federal Reserve, Chairman
Bernanke could not answer my question today in Financial Services
Committee,” Bachmann told WND.
She
wondered if there’s a political motive.
“I
asked whether the Treasury Department was cooking the federal government’s
books as it was reported that the Feds debt balance sheet remained at
$16,699,396,000,000 for 56 days straight, presumably so the Treasury Department
wouldn’t officially register that once again the Congress had exceeded its
legal borrowing limits.”
For the moment, the federal government is able to recklessly
borrow and spend money and investors are rewarding this behavior with super low
interest rates.
Unfortunately, this state of affairs is completely and totally
unsustainable. At some point global financial markets will begin to
behave rationally, and when that happens it is going to mean a tremendous
amount of pain for the United States.
Over the past decade, the U.S. government has added more than 11
trillion dollars to the national debt at a time when the U.S. economy has
been steadily declining. Anyone that thinks that we can continue to pile
up more debt like this indefinitely does not know what they are talking about.
The following are some more statistics about the U.S.
national debt for you to consider…
-Back in 1980, the U.S. national debt was less than one
trillion dollars. Today, it is rapidly approaching 17 trillion dollars.
-During Obama’s first term, the federal government accumulated
more debt than it did under the first 42 U.S presidents combined.
-The U.S. national debt is now more than 23 times
larger than it was when Jimmy Carter became president.
-If you started paying off just the new debt that the
U.S. has accumulated during the Obama administration at the rate of one dollar
per second, it would take more than 184,000 years to pay it off.
-If right this moment you went out and started spending one
dollar every single second, it would take you more than 31,000
years to spend one trillion dollars.
-If you were alive when Jesus Christ was born and you spent one
million dollars every single day since that point, you still would not have
spent one trillion dollars by now.
-Some suggest that “taxing the rich” is the answer. Well,
if Bill Gates gave every single penny of his entire fortune to the U.S.
government, it would only cover the U.S. budget deficit for 15 days.
-If the federal government used GAAP accounting standards like
publicly traded corporations do, the real federal budget deficit for 2011 would
have been 5 trillion dollars instead of 1.3 trillion dollars.
-The United States already has more government debt per
capita than Greece, Portugal, Italy, Ireland or Spain does.
-At this point, the United States government is
responsible for more than a third of all the government debt in the
entire world.
-The amount of U.S. government debt held by foreigners
is about 5 times larger than it was just a decade ago.
-The U.S. national debt is now more than 37 times
larger than it was when Richard Nixon took us off the gold standard.
-The U.S. national debt is now more than 5000 times larger than
it was when the Federal Reserve was first created.
-Boston University economist Laurence Kotlikoff is warning that
the U.S. government is facing a gigantic tsunami of unfunded liabilities in the
coming years that we are counting on our children and our grandchildren to
pay. Kotlikoff speaks of a “fiscal gap” which he defines as “the present
value difference between projected future spending and revenue”. His
calculations have led him to the conclusion that the federal government is
facing a fiscal gap of 222 trillion dollars in the years ahead.
For the moment everything is fine because interest rates are
incredibly low and the mockers in the “deficits don’t matter” fan club are
having a field day.
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