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The Budget Proposal

As written, the White house proposed $3.8 Trillion 2013 budget admits to a deficit of $1.3 Trillion, so revenues are expected to be $2.5 Trillion. If it goes through, our national checking account will be overdrawn by 34%. The proposal assumes that the Treasury will collect $150 Billion extra by increasing taxes on the wealthy & ending some of the perquisites in the Tax code. Of our current deficit, $454 Billion is interest as of year end 2011. Under the proposal, interest payments will rise to $491 Billion in fiscal 2013. This level of interest payments has only been accomplished because the Fed has kept rates at levels not seen since right after WWII: Zero at the short end; less than 2% on the 10 year Treasury's & 3.11% for 30 year money. The Fed has already said it will not raise rates until at least 2014. As of 2011, we have a total Government debt of $15.536 Trillion putting our national interest rate at 2.92%. The new budget will raise the debt to $16.836 Trillion. We have a dilemma often seen before but rarely regarded as worrying by governments: If the stimulus policies, designed to heal the wreckage of successive government financed booms-turned-to-bust of the past 20 years, finally do work, rates will have to rise. If the policies fail, the economy will limp along with an ever increasing debt burden and even if current rates stay where they are and deficits continue to grow at the proposed $900 Billion per year, the 2.92% rate will increase the interest alone by roughly $26 billion per year. Assuming the numbers presented by the White House actually come true, we will have interest payments of more than $500 Billion in 2013 and should the world decide that - as with the PIIGS, Iran, Iceland etc. - our debt is too risky, they will stop buying our bonds and rates will rise. If rates rise just to the long term average of 6.67% on the 10 year, we could see interest costs above $1.1 Trillion. Making matters worse, our average T bond matures in about 3 years, so about $8 Trillion will have to find new lenders within 6 years. This is a trap of our own making & getting out of it will not be without tears.

Sources: U.S. Treasury; Federal Reserve; babylontoday.com