Monday, November 23, 2009

And they just now noticed this?

Years ago I had a book whose title I can't recall (I think it was by Larry Burkett), something to the effect that sometime in the early 2000s, the US would owe more on its debt than the entire tax revenue could cover. Well, we made it a bit past the early 2000s, but the premise is still valid: the US is borrowing so much money that it is now pretty much impossible to pay it all back, and close to impossible to service the debt in such a way that it actually gets paid off and still leaves the government something to run on. In other words, the US is actuarially broke.

The New York times just now noticed. The graphic below is from a sidebar of the article, not the article itself. If you jump to the actual article, it will display much better in a dedicated multimedia window.

New York Times Online
Payback Time: Wave of Debt Payments Facing U.S. Government
Published: November 22, 2009

...Even as Treasury officials are racing to lock in today’s low rates by exchanging short-term borrowings for long-term bonds, the government faces a payment shock similar to those that sent legions of overstretched homeowners into default on their mortgages.

With the national debt now topping $12 trillion, the White House estimates that the government’s tab for servicing the debt will exceed $700 billion a year in 2019, up from $202 billion this year, even if annual budget deficits shrink drastically. Other forecasters say the figure could be much higher.

In concrete terms, 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.

The potential for rapidly escalating interest payouts is just one of the wrenching challenges facing the United States after decades of living beyond its means...

...Americans now have to climb out of two deep holes: as debt-loaded consumers, whose personal wealth sank along with housing and stock prices; and as taxpayers, whose government debt has almost doubled in the last two years alone, just as costs tied to benefits for retiring baby boomers are set to explode.

...The United States will not be the only government competing to refinance huge debt. Japan, Germany, Britain and other industrialized countries have even higher government debt loads, measured as a share of their gross domestic product, and they too borrowed heavily to combat the financial crisis and economic downturn. As the global economy recovers and businesses raise capital to finance their growth, all that new government debt is likely to put more upward pressure on interest rates.

Even a small increase in interest rates has a big impact. An increase of one percentage point in the Treasury’s average cost of borrowing would cost American taxpayers an extra $80 billion this year — about equal to the combined budgets of the Department of Energy and the Department of Education.

But that could seem like a relatively modest pinch. Alan Levenson, chief economist at T. Rowe Price, estimated that the Treasury’s tab for debt service this year would have been $221 billion higher if it had faced the same interest rates as it did last year.

...“Clever debt management strategy,” the group said, “can’t completely substitute for prudent fiscal policy.”

And they just now noticed this?

If you followed the link to the graphic and looked at it up close, you notice that the Social Security system is a huge holder of worthless IOUs from the federal government, followed by China, Japan, and several other foreign nations. You'll also notice there are less domestic holders now than there were in past year - the big institutional buyers in the US aren't dumb enough to continue buying notes they know are worthless. No, they leave that to the poor guys on Main Street who buy them for their kid's college funds and so forth.

China has, of course, already de facto announced they intend to get rid of the notes they have and not buy any more - so who is going to continue financing the US refusal to operate with a balanced budget?

The answer might be "no one."

Then we'll get to see the IMF come in an "restructure" our debt - and all social services, including unemployment and social security, will be wiped out. It's an irony, a poetic justice, if you will. The US forced many third world nations to gut their social safety nets in order to make them cough up the funds to pay back their creditors. There's no reason to think the US won't get the same treatment - because I'm doubting seriously the US will be willing to hand over the land, natural resources, gold and other reserves to satisfy our creditors. Nor do I think we have a sufficient number of banks to give away to China to get them to forgive our debt, much less all our other creditors.

No, this is a serious mess, and there's no way out of it that isn't going to be painful, class. Very painful.

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