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US Total Debt: Enormous and Detructive to Economy and Dollar

While the US enjoys one of the largest GDP in the world, the fact is that its GDP has been in a serious decline since 2008. If you factor GDP minus federal deficit spending, which is real GDP, it was down 7% for 2010, according to data analyzed by the Market Ticker:

Yes, folks, the United States is in a recession, any way you slice it.

A closer look at debt levels in the US economy suggests that it is the unsustainable debt levels that are the root problem behind the US economy.

When discussing debt levels in the US economy, we should be looking at two parts to the story: the debt levels of the Government (US National Debt) and the debt levels of the US Consumers (Total Personal Debt). Both are incredibly high and when added together, in what is called the US Total Debt, it is a mountain of debt on the verge of collapsing the economy. 

Most of the data is taken from http://www.usdebtclock.org and http://www.brillig.com/debt_clock/. Both are useful resources for monitoring the debt in the United States.

US National Debt: An Enormous Debt Monster

According to data published on 10 Jan 2011 by US Debt Clock Organization, the current US national debt is roughly $14,027,287,522,807.44 (equal to roughly 95% of official GDP),which can be broken down to be $45,275.50 per citizen, or $126,000 per taxpayer.

Broken down, the largest budget items are:
  • Medicare / Medicaid: $793 Billion
  • Social Security:$701 Billion
  • Defense Wars: $692 Billion
  • Income Security: $433 Billion
  • Net Interest on Debt: $202 Billion
  • Federal Pensions: $198 Billion
Many of these top budget items have their own unsustainable blackholes. The social security debt, for instance, can only get worse as more baby boomers retire, and the Social Security Trust fund of $2 trillion has already been pillaged by prior administrations as a way to minimize the appearance of running up budget deficits. Social Security in consequence carries a $14.7 trillion unfunded contingent liability and an empty trust fund. Medicare is in worse shape. Medicare spending has continued at over an 11% growth rate per year (4 times greater than inflation), and it carries an unfunded contingent liability of $77 trillion.

Moreover, the war on terror is seemingly endless, eating away hundreds of billions of taxpayer dollars every year (55% of income tax goes to military defense spending), as well as adding hundreds of billions every year to the US national debt. Infoplease has estimated that total cost of the US involvement in Iraq and Afganistan will reach $1.29 trillion by the end of the fiscal year 2011. The Bush Administration, with its legacy of engaging in these crazy foreign wars, has added $4 trillion to the National Debt. On the day President Bush took office, the national debt stood at $5.727 trillion, and the day he left, it was $9.849, which is a 71.9% increase on Mr. Bush's watch. After World War II, the national debt soared to over $270 billion – a quaint figure by today's standards, but back in 1946, the Debt amounted to 121.7 percent of the size of the total economy. Wars add to the debt and also deflate the home currency.

All wars are inflationary, and the current one is no exception, suggests inflationdata.com:

The very nature of War results in the destruction of goods.  But in normal times money is spent to produce goods which makes the world a richer place.

During a war, however, things are produced but... they are not productive things but destructive. The money is spent to destroy things. Often this is combined with an increase in the money supply in order to pay for the destruction.

This increase in the money supply combined with a decrease in goods is classic inflation.

Ancient Persia debased its coins to finance its wars against Greece, later Rome debased its money fighting against Carthage, William the Conquerer debased his currency to launch the Norman invasion,  and the British financed WWI by taking out the biggest loan in banking history.

In America, prior to the 20th century, the American colonies printed money that diminished to nothing to fight Britain, the war of 1812 raised US debt from $57 million to $127 million in 7 years and took 20 years to pay off, the Mexican war quadrupled the National Debt from $16 million to $63 million from 1846-1848, the Civil War multiplied the National Debt by 37 times, from $75 million in 1861 to $2.8 billion four years later.

In America, in the 20th century, the US government has been engaged in 16 wars, many of which were totally unnecessary in terms of national security. WWI increased the National Debt 8 times, from $3 billion to $26 billion, and WWII multiplied the National Debt 4 times to $260 billion. The cold war was expensive enough, raising the debt to $2.77 trillion by 1988, with high inflation during the Vietnam war. And now in the 21 century we have the $1 trillion spend on the war on terrorism. The government is borrowing and creating money out of thin air by inflating the money supply to finance these wars.

There is a good visual picture of the destruction of the US dollar pegged to the wars we have had:

The establishment of the Fed in 1913 paved the way for the long decline of the US Dollar, but it is no coincidence that each time there is a war, the dollar declines more steeply than before. Wars burn the dollar surely as they do cities in inflation caused from Government debt financing and Fed money printing to finance the oftentimes unnecessary war.

Another problem related to the US National Debt is that combined government (federal + state & local) spending has grown faster than the total economy, from 12% consumption of national income to 49% today, as Michael W. Hodges in his Grandfather Report has shown:

As Mr. Hodges points out in reference to the graph:

This means government now dominates/controls 4 times more of the total economic pie than before. Had government grown at the same rate as the economy, that red line would have been flat - - not rising 4 times faster than growth of the total economy. (data - Bureau Econ. Analysis)

As a result, the residual share of the economy left to the pure Private Sector (the declining blue line) has been squeezed down and down - from an 88% share of the economy to a 51% share. The capacity of the private sector to produce living standard growth has been diminished over time due to government growing faster than the total economy. Had the private sector share of the economy remained constant in its percentage of the economy, that blue line would have stayed flat - - not dropping.

This insidious growth of Government seems to be cancerous, and seemingly almost impossible to stop. In 2009, under Obama's watch, the combined spending by federal, state and local government was over $5.6 trillion ($3.5 trillion federal govt. spending and $2.1 trillion spending by state & local governments). These are record levels of spending, but in a few years, they will seem quaint.

One question: who owns this $14 trillion in US national Debt?

Here is a pie chart showing the makeup, or ownership, of the National Debt as of December 1998, courtesy of Ed Hall:

As Ed Hall explains:

As you can see, the largest slice of the pie, over 40%, is owed to the Federal Reserve, the central bank of the United States, and to other government accounts. BTW, The Fed is actually quasi-public (part private, part government) so calling it "part of the government" is not strictly true. You can find out more about The Fed by reading Wikipedia's excellent article.

The remaining 60% of the Debt is privately held by individuals, corporations, states, and foreign governments. As of November 2007, Japan ($580 billion), China ($390 billon) and the United Kingdom ($320 bilion) are the biggest foreign holders of our Debt.

The above chart information is from the June 1999 issue of the "Treasury Bulletin", a quarterly publication of the U.S. Treasury department's Financial Management Service. The Treasury Bulletin is the best place to find the latest information on this subject.

So there you have it: the Fed lends out most of the money for this debt in a vicious circle. The government needs money, and the Fed prints the money to lend to the government, getting away with charging interest on money made out of thin air. The taxpayer, in turn, is screwed twice: having to pay for the debt he never authorized and having his dollar diminished from the Fed's printing of money.

We should also keep in mind that the $14 trillion in US National Debt is just the published part of the debt. There is also $112 trillion in unfunded contingent liabilities, which represents a liability per taxpayer of $1 million. That is insane.

Total Personal Debt: Americans are drunk with Debt.

Total Personal Debt (which includes all personal obligations, Mortgage and Consumer Debt, including car loans and credit card debt) totals $16 trillion, or $52,00 per citizen, or $145,000 per taxpayer.

Most of this debt had been piling up since 1992 till now.

The Fed low interest rate policy of the early 1990s pushed people out of savings and safe investments (low interest rates create less yields for safer investments like Cds and bonds) and into the higher yields of the much riskier stock market bubble. Then when that bubble burst people lost most of their savings.

Then in 2001, in response to the bursting of the tech bubble of the late 1990s, the Fed began dramatically lowering interest rates to arrive at 1% in 2003, with the goal to expand the money supply and encourage borrowing, which should spur spending and investing. Everyone and their grandmother was encouraged to "borrow" and "buy," and it seemed to work because the economy began to expand in 2002. However, the lower interest rates worked their way into the economy to fuel the real estate market bubble. At 2001 the national medium home price ranged from 2.9 to 3.1 times medium household income and this ratio rose to 4 in 2004, and 4.6 in 2006. Record low interest rates had combined with loosening lending standards to push real estate to record highs. When the housing bubble burst in 2007, people had already lost their savings, and now they were in debt in record numbers. The mortgage debt amounts to the largest part of the Personal Debt, at $13.9 trillion.

Bernanke again lowered rates to deal with the bursting of the housing bubble, and we can only wonder what new debt bubble this will lead to in in the wake of the last.

Mr. Hodges provides a nice graph showing household debt from 1967 to 2007:

Household debt had held steady in the 1960s and early 1970s at about 53% of national income. Thereafter, the debt ratio steadily climbed upwards, and after 1992, shot up like a rocket, turning into 123% of national income by 2007. Keep in mind that the Fed Funds interest rate had been falling since 1985, which encouraged more people to borrow. The early 1990s and early 2000s marked low points in the Fed Funds rate, and these low points dramatically increased the borrowing.

Mr.Hodges makes an important observation:

As household debt ratios increased 90% faster than growth of the economy since the late 1960s when real median family incomes stopped rising, such suggests real equity & savings have not been the driving force of so-called economic growth - - it has been debt driven.

Yes, sad but true, our economy has been revolving around debt spending. Even with the crashing of the housing bubble in 2008, the debt driven economy continues -- only that the Government and Fed has been jumping in with debt spending to replace our inability to keep borrowing and spending. Their hope is that if they keep the interest rates low and flooding the banks with more money this will eventually encourage us to borrow more and keep spending as usual.

The US total debt to GDP: Worse than the Great Depression

Now, if you add the US National Debt with the Total Personal Debt, you get this ugly picture: US Total Debt is $55 trillion, or $178,00 per citizen, or
$500,000 per taxpayer.

According to the Social Security Administration, the national average annual wage is $40,405, thus the average taxpayer would work roughly 22 years without pay to equal their theoretical share of total non commercial US debts and liabilities. 

Michael Snyder writes an intriguing article in DailyMarkets.com called "The Total US Debt to GDP Ratio is Now worse than in the Great Depression," in which he points to the following chart that shows Total U.S. debt as a percentage of GDP from 1870 to 2009:

The total of all debt (government, business, and consumer) is now somewhere in the neighborhood of 360 percent of GDP, whereas in 1933 it had only reached to 299%. This greater percentage indicates that our debt bubble is much worse.

Moreover, Mr. Snyder adds that back in the 1930s, tens of millions of Americans lived on farms or knew how to grow their own food, whereas today we are dependent on the system. Our social security trust fund has been robbed, and according to an official government report, interest costs on the U.S. national debt together with entitlement programs such as Social Security and Medicare will absorb approximately 92 cents of every dollar of federal revenue by the year 2019. American workers are being outsourced to workers happy to earn much less. We have a gigantic derivatives bubble (estimated to be 600 trillion and 1.5 quadrillion dollars) that hangs over us as a weapon of mass destruction, and when it pops, there won't be enough money in the world to fix it. Lastly, back in the 1930s, the United States economy was relatively self-contained, but today we live in a global economy, which means that a severe economic crisis in one part of the world can affect us as well.

It is sad but true. We might enter into a second great depression that holds out fewer hopes and more worries. The Government and Fed and their friends on Wall Street have rigged a massive debt bubble that is fueled by low interest debts (taken out by the government and people), and owed to the Fed and its fractional banking system. Some rich few like Goldman Sachs becomes richer from rigging the bubble system in their favor, but most end more debt ridden than ever before.

No matter how you want to slice it, the U.S. economic system is broken, the debts are unsustainable, and the Fed and government policy at this point is to continue on the same path of destruction. They are turning to the same inflationary policy that got us into this mess in the first place, with the consequence that we might continue to grow the debt bubble and the dollar will continue to die.

The US is like some European countries in showing a high ratio of US National Debt to gross domestic product (GDP), but few countries can match the impossibly high ratio of US Total Debt to GDP ratio. Unlike some EU countries linked to the euro, the US could potentially inflate away some of the real value of that debt. This is the current hat trick of the Fed. If the dollar is made more worthless, through Fed money supply expansion, the value of the US Total Debt decreases, and the GDP is given a temporary and ultimately "illusionary" bump.

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