Debt Limit: A guide to American Federal Debt made easy

Comment: This is a about a year old but the message is appropriate (because things are only worse). Kicker is at the end .... worth the view.

Indebted U.S. to resemble Greece

PIMCO's Gross says indebted U.S. to resemble Greece
Excerpt:

Bill Gross, founder and co-chief investment officer of bond giant PIMCO, said he sees the U.S. going the way of Greece if it does not get its fiscal house in order.

Gross, writing in his most recent monthly investment outlook, said the U.S. must cut spending or raise taxes by 11 percent of gross domestic product over the next five to ten years in order to preserve its role as financial safe haven.

"If we continue to close our eyes to existing 8 percent of GDP deficits, which, when including Social Security, Medicaid and Medicare liabilities, compose an average estimated 11 percent annual 'fiscal gap,' then we will begin to resemble Greece before the turn of the next decade," Gross wrote.

Comment: Image source: Bring back the Greek Drachma - Problem solved

Budgetary "Ring of Fire"

Bill Gross: US Addicted to 'Budgetary Crystal Meth'
Excerpts:

"The U.S., in fact, is a serial offender, an addict whose habit extends beyond weed or cocaine and who frequently pleasures itself with budgetary crystal meth.

Uncle Sam's habit, say these respected agencies, will be a hard (and dangerous) one to break."

Washington must close both the budget deficit, which entails spending and revenue during the course of a given year, as well as a "fiscal gap," which describes the amount that will be needed to pay for social programs such as Social Security, Medicare and Medicaid that have unfunded liabilities of tens of trillions of dollars, Gross said.

The CBO, BIS and IMF have concluded that the U.S. balance sheet "is in flames and that its fire department is apparently asleep at the station house," he added. The current budget deficit is running at more than $1.2 trillion while the total national debt is more than $16 trillion and there is a fiscal gap of 11 percent of gross domestic product, which is currently $15.6 trillion.

... "Unless we begin to close this gap, then the inevitable result will be that our debt/GDP ratio will continue to rise, the Fed would print money to pay for the deficiency, inflation would follow and the dollar would inevitably decline," Gross wrote. "Bonds would be burned to a crisp and stocks would certainly be singed; only gold and real assets would thrive within the 'Ring of Fire,'" another Gross term for U.S. economic conditions.

Should that happen, the results both for investors and the U.S. economy would be catastrophic, he concluded. "If the fiscal gap isn't closed even ever so gradually over the next few years, then rating services, dollar reserve holding nations and bond managers embarrassed into being reborn as vigilantes may together force a resolution that ends in tears," Gross said. "It would be a scenario for the storybooks, that's for sure, but one which in this instance, investors would want to forget. The damage would likely be beyond repair."

Comment: Is anyone in Washington listening? Do the voters care?

Government borrows 36 cents for every dollar it spends

House Says No to Mandating Balanced Federal Budget

Excerpt:

The first House vote in 16 years on making federal deficits unconstitutional came as the separate bipartisan "supercommittee" appeared to be sputtering in its attempt to find at least $1.2 trillion in deficit reductions to head off major automatic cuts. The lead Republican on that panel said members were "painfully, painfully aware" of its Wednesday deadline for action and would work through the weekend.

The House voted 261-165 in favor of the measure to require annual balanced budgets, but that was 23 short of the two-thirds majority needed to advance a constitutional amendment.

Democrats overwhelmingly opposed the proposal, arguing that such a requirement would force Congress to make devastating cuts to social programs.

...

With the national debt now topping $15 trillion and the deficit for the just-ended fiscal year passing $1 trillion, supporters of the constitutional amendment declared it the only way to stop out-of-control spending. The government now must borrow 36 cents for every dollar it spends.

Comment: An amazing statistic - government borrows 36 cents for every dollar it spends! How long can this possibly go on?

Kicking the Debt Can: "Everybody's kicking the can down the road of too much public and private debt. The can is becoming heavier and heavier, and bigger on debt"

Roubini Says “Perfect Storm” May Clobber Global Economy

Excerpt:

Roubini's perfect storm consists of four factors:

1. The U.S.'s basket-case of an economy and budget deficit,
   
2. A potential slowdown in China,
   
3. European debt restructuring and
   
4. Stagnation in Japan.
   

Roubini says there's a one-in-three chance that these factors will clobber growth in 2013. Now, that sounds terrifying, but it all means there's a two-in-three chance that everything will be okay. (Roubini's other two possible scenarios are "anemic growth" and "accelerating growth.") One problem that seems undeniable is the European debt crisis, which has defied all attempts to paper it over and kick the can down the road. Greece is broke, and no serious analyst that I know of thinks it will ever be able to pay back its debts. The logic underlying the endless bailouts and aid-packages, therefore, is to deal with the problem later and/or hope that it somehow resolves itself. In an FT editorial today Professor Roubini said that this hope was a hallucination and that the Euro-zone needs to break apart. "There are already elements of fragility," Bloomberg quotes Roubini as saying. "Everybody's kicking the can down the road of too much public and private debt. The can is becoming heavier and heavier, and bigger on debt, and all these problems may come to a head by 2013 at the latest." ..

Comment: Any candidate for POTUS who does not speak to this problem is not a viable candidate.

PIMCO's Gross: US Debt Crisis worse than Greece's

US Is in Even Worse Shape Financially Than Greece: Gross

Excerpt:

Much of the public focus is on the nation's public debt, which is $14.3 trillion. But that doesn't include money guaranteed for Medicare, Medicaid and Social Security, which comes to close to $50 trillion, according to government figures.

The government also is on the hook for other debts such as the programs related to the bailout of the financial system following the crisis of 2008 and 2009, government figures show.

Taken together, Gross puts the total at "nearly $100 trillion," that while perhaps a bit on the high side, places the country in a highly unenviable fiscal position that he said won't find a solution overnight.

"To think that we can reduce that within the space of a year or two is not a realistic assumption," Gross said in a live interview. "That's much more than Greece, that's much more than almost any other developed country. We've got a problem and we have to get after it quickly."

Comment: Scary

Vanishing Point on US Debt

America running out of time to cut debt

Excerpt:

Over the last six months, as part of our graduate programs at Stanford University, and in conjunction with former U.S. Comptroller General David Walker (a longtime critic of unsustainable entitlement spending) and the Comeback America Initiative, we developed a Sovereign Fiscal Responsibility Index that assesses fiscal responsibility across most Organization for Economic Cooperation and Development and so-called BRIC countries (Brazil, Russia, India and China).

Combining the three major components of fiscal responsibility -- current debt levels, the projected future debt path and fiscal governance -- this index predicts the U.S. could face a fiscal crisis in the next two to three years if spending and tax revenues continue at current levels.

Right now the U.S. debt is like a freight train running downhill. The agreement to prevent a shutdown was like putting a shopping cart in the way. We still need to pull the brakes to keep our country out of a fiscal abyss.

Our index shows that the U.S. ranks 28th overall out of 34 countries, in the same territory as the so-called PIIGS of Europe -- Portugal, Iceland, Ireland, Greece and Spain -- countries that are already facing fiscal hardship, some from years of irresponsible behavior.

Comment: Just like Kowalski couldn't drive the Challenger through the bulldozers in Vanishing Point

Still with stunt car (older Camaro):

Will the Debt Binge end?

Our Debt Binge Is Ending — And The Middle Class Will Get Clobbered

Excerpt:

The US's $1.6 trillion-a-year deficit, Mauldin believes, must quickly be cut to about $300 billion a year, or the US will face a debt crisis. And given that our current government can barely find ways to chop $30 billion of spending from the 2011 budget, these cuts are going to be painful.

What will the forced austerity mean for ordinary Americans?

Higher taxes and significantly reduced Medicare and Medicaid spending, for starters, Mauldin says. And then cuts to almost everything else in the budget, including military spending and education.

In other words, as has so often been the case in the past couple of decades, the middle class will bear the brunt of the impact.

Comment: Question: "Will the Debt Binge end?". Answer: "Well its got to or we will be bankrupt!"

Understanding Congress’s solution to the federal deficit problem

Understanding Congress’s solution to the federal deficit problem

News accounts on the latest federal budget deal gave the numbers in a vacuum, e.g., “The deal cuts $38 billion from last year’s budget. It’s being called the largest domestic spending cut in U.S. history” (source). How can an individual voter make sense of quantities that are ordinarily written in scientific notation? I think the easiest way is to divide everything by 100,000,000 (10^8).

Let’s start with federal spending. The FY 2011 federal budget is approximately $3.82 trillion (3.82×10^12). Of that, approximately $2.17 trillion will be paid for by taxes collected and the remaining $1.65 trillion will be borrowed from our grandchildren. If we divide everything by 100 million, the numbers begin to make more sense.

We have a family that is spending $38,200 per year. The family’s income is $21,700 per year. The family adds $16,500 in credit card debt every year in order to pay its bills. After a long and difficult debate among family members, keeping in mind that it was not going to be possible to borrow $16,500 every year forever, the parents and children agreed that a $380/year premium cable subscription could be terminated. So now the family will have to borrow only $16,120 per year.

Comment: HT: Paleoevangelical

Deficit dithering: "complacency"

S&P Cuts U.S. Ratings Outlook to Negative

Excerpt:

Standard & Poor's cut its outlook on the U.S. to negative, increasing the likelihood of a downgrade from its triple-A credit rating, as the U.S. continues to struggle with large budget deficits and rising government debt.

"More than two years after the beginning of the recent crisis, U.S. policy makers have still not agreed on how to reverse recent fiscal deterioration or address longer-term fiscal pressures," S&P credit analyst Nikola G. Swann said. The ratings company believes the chances that the U.S.'s credit rating will be lowered within two years are at one in three, or higher, the analyst said.

The news sent stocks sharply lower and pushed bond yields higher, boosting the yen as investors moved funds into currencies seen as havens in times of trouble. "The markets have been shaken out of their complacency," said Lena Komileva, a currencies analyst at U.S. bank Brown Brothers Harriman in London. "People are being forced to face reality."

S&P said Monday it sees a risk that policy makers might fail to agree on how to address budgetary challenges by 2013, leaving the U.S. fiscally weaker than other triple-A-rated countries. It also said, though, that the U.S.'s flexible, highly diversified economy will help to support the rating, while a consistent global preference for the dollar gives the U.S. "unique external liquidity."

Comment: Congress arguing about 38 Billion in cuts two weeks ago would be like my arguing with my wife about cutting a nickle from our grocery bill.

Dallas Federal Reserve Bank President Richard Fisher: "If we continue down on the path on which the fiscal authorities put us, we will become insolvent"

Fed's Fisher: U.S. debt situation at tipping point

Excerpt:

The U.S. debt situation is at a "tipping point," Dallas Federal Reserve Bank President Richard Fisher said on Tuesday, and urged the U.S. central bank to refrain from any further stimulus measures.

"If we continue down on the path on which the fiscal authorities put us, we will become insolvent. The question is when," Fisher said in a speech at the University of Frankfurt.

Fisher, seen by economists as one of the most hawkish policymakers within the Fed, said that although debt-cutting measures would be painful, he expected the U.S. to take the necessary actions.

"The short-term negotiations are very important. I look at this as a tipping point."

He said the U.S. economy was now growing under its own steam, but voiced his concerns about building global inflation pressures and said it was now time for the central bank to stop pumping out extra support.

"The Fed has done enough, if not too much, and we should do no more.. In my opinion no further accommodation is necessary after June either by tapering off the bottom of treasuries or by adding another tranche of purchases outright."

Comment: Uncharted territory ... what would that mean?

Check out this video (upcoming financial crisis)

Video

Comment: I only watched 30 min. I understand it is 80 min long. What do you think? Porter Stansberry is a controversial figure. Google search on him.

Sobering Fiscal Realities

Running the government on 8 cents

Excerpt:

Today, the United States spends roughly 76 cents of every federal tax dollar on just four things: Medicare, Medicaid, Social Security and interest on the $14 trillion debt. That leaves 24 cents of revenue to pay for everything else the federal government does.

That's not a lot. But it's a mint compared to what could be left over by 2020, according to a simulation made by the Government Accountability Office.

Barring serious efforts to curb the growth in the country's debt, by 2020 Washington could be spending 92 cents of every tax dollar on Medicare, Medicaid, Social Security and interest alone. That would leave just 8 cents to pay for everything else.

How much of "everything else" can 8 cents buy? Not a lot, especially relative to what Americans are accustomed to their government providing.

Comment: At the tipping point?

Federal Deficit: Echoes of Spain?

Tax deal says we're deadbeats

Excerpts:

I've actually been able to find just one example in Western history that sheds any light on the situation the United States and the world finds itself facing -- the multiple bankruptcies of Spain in the 16th and 17th centuries.

In the 16th century, the Spanish Empire stretched farther across the globe than any previous empire. Starting from an Iberian peninsula unified under Castile and Aragon only in 1492, the Spanish empire grew to encompass first the island then known as Hispaniola, then Cuba, Mexico, the bulk of South America except for Brazil, and the islands of Guam and the Philippines. In Europe, Spanish monarchs ruled the Netherlands, Belgium, much of Italy and parts of Africa.

And it was a fabulously rich empire. The great silver mines of Peru and Mexico began to deliver a river of precious metal -- supplemented by gold from conquest and mining -- as early as 1511. Spain imported 260,000 kilograms of silver and 5,000 kilograms of gold from 1511 to 1550. And that was just the beginning. From 1591 through 1610, the country imported 4.9 million kilograms of silver and 31,000 kilograms of gold. The flood of gold and silver into Europe, a region previously starved for precious metals, was so great that the supply depressed the price for both metals and set prices for goods and services climbing.

But less than half of this silver and gold remained in Spanish hands. About a third went to China to pay for Spanish imports of silk, porcelain and other luxury goods. The remainder went to pay for Spanish imports from the rest of Europe. The Spanish economy itself was an increasingly uncompetitive hulk. Spain lived beyond its means, supported on that wave of New World silver and gold.

And that included the Spanish monarchy. Silver and gold poured in, but running an empire is expensive when it includes almost constant war in Europe with a constellation of national enemies that included France and England, plus local rebellions in the Netherlands and Italy, plus more than a century of land and sea battles against an Ottoman Empire that moved relentlessly westward after its capture of Constantinople in 1453.

The kings of Spain found it much easier to borrow money -- after all, what lender could afford to say no to the most powerful kingdom in Europe? -- than to reform the Spanish economy. But the seemingly inexhaustible flow of treasure from the Western hemisphere encouraged Spanish kings to think they could borrow and repay any sum -- and what bank would have had the courage to question the creditworthiness of the most powerful kingdom in Europe? The result was bankruptcy in 1557 that left the Fugger bank in Augsburg holding the bag.

The circumstances of that 1557 bankruptcy may sound familiar. The bank made the classic mistake of mismatching assets and liabilities: The Fugger bankers took out long-term loans in Augsburg in order to make short-term loans to the Spanish king. Payments on the long-term loans were to come from payments on the short-term Spanish loans. Then, in 1557, Phillip II of Spain decided that he had more use for two payments intended for the Fuggers than they did. In effect, Spain declared bankruptcy, and the bank renegotiated its loans with reduced interest payments and a longer payment schedule.

The same thing happened again in 1575 when Spain again stopped paying on its loans, and in 1596. That last Spanish bankruptcy ended the Fugger bank and gave lucky Genoese bankers the opportunity to finance Spain.

In a desperate attempt to satisfy its creditors, Spain debased its currency, replacing silver and gold in its coins with copper in 1599. That led to runaway inflation in the first half of the 17th century. From 1625 to 1650, prices climbed by 40%.

By the second half of the century, the Spanish economy was in rapid decline as high taxes on peasant producers -- just about the only class that would pay significant taxes -- led to a decline of food and wool production, and high inflation made Spanish exports uncompetitive against imports from England, France and the Netherlands.

And by 1675 Spain, once the greatest empire in the world, was ready to be picked apart by the France of Louis XIV.

Comment: An excellent read.

We are not exempt: "crippled by borrowing, by interest payments, by debt"

America at Debt's Door: A Primer

Excerpt:

Almost every year, the American federal government spends more money than it collects in taxes. For the just-finished 2010 budget year, it spent roughly $1.3 trillion more than it collected. That's the second-largest deficit in American history. The largest was the $1.4-trillion deficit in 2009. Both occurred during the Obama administration.

The largest deficit prior to the Obama administration was $455 billion in 2008 -- less than a third of the $1.4-trillion record set in 2009.

The sum of all the deficits the federal government has accumulated year after year is the federal debt, which is currently $13.6 trillion. Of that figure, $9 trillion is debt held by the public. The rest is money that one part of the federal government owes to another part. Most economists agree that the debt held by the public is what really affects the economy, and so that's the figure they focus on.

Except during World War II, the federal debt held by the public has never exceeded 50 percent of the nation's annual economic output. Not even during the Civil War, World War I, or any other war. Never.

That is, until now.

The federal debt held by the public currently represents 62 percent of the nation's annual economic output. And it's headed even higher.

The Congressional Budget Office (CBO) estimates that the debt will reach 80 percent by 2035 if current laws prevail. However, if widely expected changes to current law are made, it will reach 90 percent by 2020, 110 percent by 2025, and 180 percent by 2035.

Under either scenario, the federal debt held by the public will grow faster than the nation's annual economic output.

The more it grows, the more the government will have to borrow. Of course, the government has to pay interest on what it borrows. This added interest will make the debt even larger.

According to the CBO, growing levels of debt relative to output increases the probability of a "sudden fiscal crisis."

If such a crisis occurred, lenders -- like China, which is the largest foreign lender to America -- would lose confidence in the American federal government's ability to pay them back. As a result, they would sharply raise the interest rates on the debt. This would lead to spiraling interest payments that would consume a rising proportion of tax revenue and rapidly raise the debt to unsustainable levels.

To lower the interest rates to affordable levels, policymakers would have to restore lenders' confidence by increasing taxes, cutting spending, or both.

U.S. Admiral Mike Mullen, chairman of the Joints Chiefs of Staff, recently said that the single biggest threat to national security is the federal debt.

The estimated $600 billion in interest on the federal debt in 2012 is "one year's worth of defense budget," Mullin said. He predicted that the defense budget will eventually be cut to accommodate the "wave of debt."

U.S. Defense Secretary Robert Gates recently said, "We can't have a strong military if we have a weak economy."

The weakening of American military power would affect not just America. It would also affect those nations that rely on America for their security. What will happen to them when America is forced to reduce overseas military operations?

A large body of historical evidence supports the concept that empires rise or fall based on their economies. Take the British Empire, for example. Over a century ago, it expanded from economic to military to political power. At its height, the British Empire controlled roughly a quarter of the world's land surface. However, Britain's global dominance ended when its economy deteriorated.

During a speech at the Brookings Institution, U.S. House Majority Leader Steny Hoyer said, "Spain under the Habsburgs, France under Louis XVI, the Ottoman Empire in the 19th century, the British Empire in the 20th -- all of them were crippled by borrowing, by interest payments, by debt. We are not exempt. In every era, these fiscal issues are questions of national security and national success."

Comment: Image source

The nature of America's fiscal problem

In two years, a 21.4% increase

Excerpt:

Late last week the Congressional Budget Office released its preliminary budget tallies for fiscal year 2010, and the news is that the U.S. government had another fabulous year—in spending your money. We didn't expect President Obama to hold a press conference, but why are Republicans so quiet?

Spending rolled in for the year that ended September 30 at $3.45 trillion, second only to 2009's $3.52 trillion in the record books. But don't think this means Washington was relatively less spendthrift. CBO reports that the modest overall spending decline results from three one-time events.

Comment: This WSJ article with accompanying chart is a worthwhile read. We are about ready to tip over to a 2nd rate nation because of this kind of spending!

The US is "engaging in Enron accounting"

US Government 'hiding true amount of debt'

Excerpt:

THE actual figure of the US' national debt is much higher than the official sum of $US13.4 trillion ($14.3 trillion) given by the Congressional Budget Office, according to analysts cited on Sunday by the New York Post.

"The Government is lying about the amount of debt. It is engaging in Enron accounting," said Laurence Kotlikoff, an economist at Boston University and co-author of The Coming Generational Storm: What You Need to Know about America's Economic Future.

"The problem is we're seeing an explosion in spending," added Andrew Moylan, director of government affairs for the National Taxpayers Union.

In 1980, the debt - the accumulated red ink incurred by the Federal Government - was $US909 billion.

This represented some 33 per cent of gross domestic product, according to the Congressional Budget Office (CBO).

Thirty years later, based on this year's second-quarter numbers, the CBO said the debt was $US13.4 trillion, or 92 per cent of GDP.

The CBO estimates the debt will be at $US16.5 trillion in two years, or 100.6 per cent of GDP.

But these numbers are incomplete.

They do not count off-budget obligations such as required spending for Social Security and Medicare, whose programs represent a balloon payment for the Government as more Americans retire and collect benefits.

In the case of Social Security, beginning in 2016, the US Government will be paying out more than it is collecting in taxes.

Without basic measures - such as payment cuts or higher payroll taxes - the system could be on the road to bankruptcy, according to officials.

"Without changes," wrote Social Security Commissioner Michael Astrue, "by 2037 the Social Security Trust Fund will be exhausted. There will be enough money only to pay about $US0.76 for each dollar of benefits."

Mr Kotlikoff and Mr Moylan agree US national debt is much more than the official $US13.4 trillion number, but they disagree over how to add up the exact number.

Mr Kotlikoff says the debt is actually $US200 trillion.

Mr Moylan says the number is likely about $US60 trillion.

Comment: Image source. The image is dated .. need to plug in Obama, Pelosi, and Reid. But you get the idea.

When governments renege

Morgan Stanley Says Government Defaults Inevitable

Excerpt:

Investors will face defaults on government bonds given the burden of aging populations and the difficulty of securing more tax revenue, according to Morgan Stanley.

“Governments will impose a loss on some of their stakeholders,” Arnaud Mares, an executive director at Morgan Stanley in London, wrote in a research report today. “The question is not whether they will renege on their promises, but rather upon which of their promises they will renege, and what form this default will take.” The sovereign-debt crisis is global “and it is not over,” the report said.

Borrowing costs for so-called peripheral euro-region nations such as Greece and Ireland surged today, resuming their ascent on concern that governments won’t be able to narrow their budget deficits. Standard & Poor’s downgraded Ireland’s credit rating yesterday on concern about the rising costs to support nationalized banks. The yield on Greek debt rose to more than 900 basis points above that of Germany today, the most since the European Union and International Monetary Fund created a 750 billion euro ($948 billion) bailout package in May.

Mares said debt as a percentage of gross domestic product is a false indicator of an economy’s health given it doesn’t reflect governments’ available revenue and is “backward- looking.” While the U.S. government’s debt as a percentage of GDP is 53 percent, one of the lowest ratios among developed nations, its debt as a percentage of revenue is 358 percent, one of the highest levels, the report said.

Comment: Shocking but not surprising!

We borrow 41¢ for every $ 1 spent

White House predicts record $1.47 trillion deficit

Excerpt:

New estimates from the White House on Friday predict the budget deficit will reach a record $1.47 trillion this year. The government is borrowing 41 cents of every dollar it spends.

Comment: This should scare any sane person

$ 13 Trillion and counting

http://www.usdebtclock.org/