U.S. Debt May Be Next Economic Crisis

With all of the rhetoric, obfuscation, and spin coming out of Washington these days, some might find it hard to see just where our current policies are leading us. One look at the following chart of federal receipts, outlays, and borrowing, however, and the facts seem pretty clear.

click to enlarge

Put that together with the following report from the Associated Press, "Mountain of Debt: Rising Debt May Be Next Crisis," and it makes you wonder whether this year's July 4th holiday should really be a time for celebration.

The Founding Fathers left one legacy not celebrated on Independence Day but which affects us all. It's the national debt.

The country first got into debt to help pay for the Revolutionary War. Growing ever since, the debt stands today at a staggering $11.5 trillion — equivalent to over $37,000 for each and every American. And it's expanding by over $1 trillion a year.

The mountain of debt easily could become the next full-fledged economic crisis without firm action from Washington, economists of all stripes warn.

"Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth," Federal Reserve Chairman Ben Bernanke recently told Congress.

Comments

[Mad Hedge F...:]

No Kidding. I know what keeps Obama awake at night. Let’s say we spend our $2 trillion and get a couple of quarters of weak 2% type growth. Then once the effects of the stimulus wear off, we slip back into recession, setting up a classic “W” type recession. Unemployment never does stop climbing. This happened to Roosevelt in the thirties. So congress passes another $2 trillion reflationary budget. Everybody get’s wonderful new mass transit and alternative energy infrastructure. But with $4 trillion in spending packed into two years inflation really takes off. The bond market collapses, the dollar tanks big time, gold goes ballistic to $3,000, and silver to $50. Ben Bernanke’s replacement has no choice but to engineer an interest rate spike, taking the Fed funds rate up to a Volkeresque 20%. Housing, having never recovered, drops by half again. This all happens in the 2012 election year. Obama is burned in effigy, a Mormon is elected president, and the Republicans, reinvigorated by new leadership, retake both houses of congress. We invade Iran. Crude hits $200. This is not exactly a low probability scenario. Remember Jimmy Carter? This is why junk bond yields are still stubbornly high at 14.5%, and credit default swaps are at lofty levels. The risk of Armageddon is still out there. Just thought you’d like to know. Pass the Ambien.

Jul 05 11:36 AM

[morph366:]

The blue line on the graph is the one the government can't fake and the current policy is based on the notion that only by pushing up the green line even further will it be possible to stop the blue line from continuing to drop.
There's Mr. Obama's gotcha.

Jul 05 11:41 AM

[Neil459:]

Sorry, but your dreaming, this government can fake anything they want because no major media is scrutinizing their actions or words.

On Jul 05 11:41 AM morph366 wrote:
> The blue line on the graph is the one the government can't fake and
> the current policy is based on the notion that only by pushing up
> the green line even further will it be possible to stop the blue
> line from continuing to drop.
> There's Mr. Obama's gotcha.

Jul 05 01:29 PM

[CautiousInv...:]

In the years leading up to the recession, credit market facilitated around $4 trillion of borrowing and lending each year. This is an approximation and good ballpark number to use in putting numbers to this issue.

On the borrowing side, federal, state and local governments borrowed on average $.5 trillion annually; households $1.0 trillion; non-financial corporations $.3 trillion; domestic financial corporations $1.3 trillion; and all other $.9 trillion ( GSE's, Agency, ABS).

As of late foreign investors bought about $.8 trillion of various debt each year; with the world competing for funds, let's assume we attract $.5 trillion in foreign debt. Let's further assume the US credit market has the capacity to supply its recent average of $3.2 trillion, which may be a bit of a stretch with the death of the shadow banking system and the hobbled banking system.

I estimate US borrowing needs will be on the order of $1.5 trillion/year through 2014, implying the US will need to attract $1.0 trillion from within after borrowing $.5 trillion from abroad. This would leave around $2.2 trillion of domestic lending to available to satisfy what had been on average $3.5 trillion......we lost $.3 trillion of foreign money and the government is borrowing an additional $1 trillion each year.

This immediately raises the issues of (1) crowding out in which the government displaces private borrowing and (2) potential monetization of debt by the Fed directly purchasing Treasury debt in the event there insufficient demand or interest in the avalanche of debt that will flood the market. Even with deleveraging I don't think this is sustainable.

There is also the matter of how much foreign capital we can attract in world in which all advanced economies are pursuing similar policies responses along with the IMF and World Bank. And with respect to China and some other large creditors, there is concern over the stability of our currency owing to our immense borrowing needs. They will walk a fine line, supporting the dollar just enough so it does not fall apart but no more than that to avoid additional exposure to the dollar.

With a crippled banking sytem, massive deficits, concern over the stability of the dollar, frightened foreign investors and the government to become the elephant in the credit market, it's hard not to be pessimistic

Jul 05 03:17 PM

[Steven Hansen:]

good discussion and opinions. we have entered a period of only bad options facing us on how to address the economy. unfortunately, politicians will always take the path of action (look what happened to hoover).

the path of fiscal responsibility will send the economy into a tailspin. i would select an intermediate path of starting scaling back in budget areas such as military (our biggest threat right now is economic). i would temporarily limit liability lawsuits to see if it would rechannel these funds into productive economic uses.

Jul 06 12:03 AM

[derryl:]

I was about to ask how a "commitment to fiscal sustainability" could possibly be realized in this grotesque deficit environment when Steve offered a couple of measures that would begin to trim the spending side. But I don't know. I am not convinced that there is any possible combination of spending cuts and revenue increases that can restore the US budget to a sustainable path starting from where it's at now.

Spending cuts mean declining incomes for whoever was receiving the spending, which means declining income and other taxes from those people, and declining economic participation from those people, which further increases economic contraction. Tax increases which, if they are to lead to fiscal sustainability, must be used first to stop deficits and then to pay down debt, also take money out of the pockets of American businesses and consumers which reduces GDP. So the government must take an expanding share out of a shrinking pie in order to move toward sustainability.

Unless we experience some miracle of productivity I just don't see how the conventional weapons of revenue hikes and spending cuts can realistically turn this thing around.

Jul 06 01:34 AM

[Isnt_It_Jus...:]

Are you saying the US has to actually produce something of value to someone else to get out of debt? That's such old school no one talks about it. We will get gov parlor tricks instead.


On Jul 06 01:34 AM derryl wrote:

> I was about to ask how a "commitment to fiscal sustainability" could
> possibly be realized in this grotesque deficit environment when Steve
> offered a couple of measures that would begin to trim the spending
> side. But I don't know. I am not convinced that there is any possible
> combination of spending cuts and revenue increases that can restore
> the US budget to a sustainable path starting from where it's at now.
>
>
> Spending cuts mean declining incomes for whoever was receiving the
> spending, which means declining income and other taxes from those
> people, and declining economic participation from those people, which
> further increases economic contraction. Tax increases which, if
> they are to lead to fiscal sustainability, must be used first to
> stop deficits and then to pay down debt, also take money out of the
> pockets of American businesses and consumers which reduces GDP.
> So the government must take an expanding share out of a shrinking
> pie in order to move toward sustainability.
>
> Unless we experience some miracle of productivity I just don't see
> how the conventional weapons of revenue hikes and spending cuts can
> realistically turn this thing around.

Jul 06 10:49 AM

[Gregman2:]

Good points. See: www.debtdeflation.com/.../

Jul 06 01:04 PM

[Chancer:]

Read Fortune, June 22, pages 54-60 : "We Owe What?"

It mentions a VAT, in our future, ten times.

The debt itself will not be a problem if Obama and liberal Democrats create a VAT to pay for the debt.

What will be the problem is the higher cost of living and decline in American living standards that will result from the VAT, "Crap" and Trade, single-payer national healthcare (in Obama's second term), and other socialist policies to remake the USA into the United States of Euro-America.

Jul 06 03:03 PM

[punk_ash:]

VAT is a very scary monster. There is a huge add-on between what a thing sells for us and what it is advertised for. Go shop in Europe and see how little you get for your money. No wonder no one buys anything there unless they have to. This VAT might mean money going to Government what otherwise would have gone to China.

Just buy Food and gas.


On Jul 06 03:03 PM Chancer wrote:

> Read Fortune, June 22, pages 54-60 : "We Owe What?"
>
> It mentions a VAT, in our future, ten times.
>
> The debt itself will not be a problem if Obama and liberal Democrats
> create a VAT to pay for the debt.
>
> What will be the problem is the higher cost of living and decline
> in American living standards that will result from the VAT, "Crap"
> and Trade, single-payer national healthcare (in Obama's second term),
> and other socialist policies to remake the USA into the United States
> of Euro-America.

Jul 13 02:00 AM