Monday, January 05, 2009

what if the rest of the world declines to buy the debt?

U.S. Debt Expected To Soar This Year
$2 Trillion Increase May Test Federal Ability to Borrow
By Lori Montgomery
Washington Post Staff Writer
Saturday, January 3, 2009; Page A01

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...

...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."

...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...

..."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."

Default is when foreign nations stop asking nicely for the US to turn over assets and simply start seizing them. If those assets happen to be still on US soil, well, that might get a bit ugly, wouldn't you say? Just a bit.

There are 300 million households in the US, and 10.7 Trillion-with-a-T in debt that we, the taxpayers, will have to cough up - plus interest. That's 107 with eleven zeros behind it. But let's ignore the interest just for a moment. Just the principal alone means each household in this country will have to cough up $35,700 in taxes just to cover the principle, not even counting the interest, and that's only if we paid off the national debt TODAY. (Or is that $357,000 per household? Even I'm confused now!) Tomorrow the figure will be higher. And the next day it will be higher still. Does anyone really think this debt can be paid at all? The honest answer is no, it can't. And as soon as foreign investors realize that is probably the case, they aren't going to buy any more US debt.

At that point, we live within our means on a balanced budget whether we like it or not. Entire departments of government will simply stop functioning due to lack of funds. Since the government dare not default on its debts, what will be cut from the budget will most likely be social services of every kind, education and development - who knows, maybe even the military will be recalled home due to lack of funds, but I doubt it. Saving face will be more important to the powers that be than rational reallocation of available funds. It always has been.

Read up, please, on the great bankruptcies of the past - hyperinflations and currency collapses especially. Our economy has nowhere else to go.

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