Incoming! Debt Wave
Research for Online Investors

by John Dalt

11/23/09

The government’s economists have been telling us, “Consumers have lived beyond their means!” We borrowed too much money for homes, too much for toys, too much for widgets from China, and now the bill is due. The nation’s consumers borrowed on second mortgages and ran up credit card balances. Falling home prices shut off access to second mortgages, if not first mortgages. The credit crisis along with federal legislation has forced banks to cut back credit card offers. This has worked in tandem with deteriorating credit ratings to reduce money available to consumers. The economy has sputtered as consumer spending disappeared.

The New York Times tells us the same thing is about to happen to Uncle Sugar (the federal government), in, “Wave of Debt Payments Facing U.S. Government.” Uncle Sugar has been borrowing for years (deficit spending) against the ‘good faith and credit’ of the United States. The game is almost up. Uncle Sugar is running out of options. The Treasury Department plays a rigged game; they get to set their own interest rates. That is, until the buyers of their bonds demand more.

The Federal Reserve has created more than $1.5 trillion to buy Treasury bonds, and mortgage backed securities.  That is how they rig the game.  This is called ‘quantitative easing’, creating money in a computer in the bowels of the Federal Reserve.  They don’t even need a printing press!

The U.S. faces three trends that are set to overwhelm the ability to finance future deficit spending.

• Exploding new deficits.
• Ballooning renewals (refunding) of roll over debt.
• Higher interest rates.

The annual budget deficit has increased from under $500 billion to more than $1.7 trillion, and congress is debating more spending by ‘Nationalizing’ health care. According to Fox News, the U.S. paid $383 billion in interest to holders of our national debt in 2009 The government is currently borrowing almost 50 cents out of every dollar it spends.

If the interest rates only increased to an average of 6% across all maturities, the annual interest payments would equal $720 billion, as the debt stands now.  That will be more than the combined budgets of Army Corp. of Engineers, National Science Foundation, Department of Commerce, Department of State, EPA, Interior Department, NASA, Homeland Security, Department of Energy, Department of Justice, HUD, Department of Education, Department of Labor, Department of Transportation, Veterans Affairs, and the Department of Agriculture.

Our national debt, the accumulation of past deficit spending, is now approaching $12 trillion dollars.  This does not include future spending that is ‘locked’ in for Social Security and Medicare benefits.  These are estimated to add another $60 trillion dollars to the national debt.

If the government cut itself in one-half to balance the budget, we would still have over $70 trillion going forward in debt and future deficits in entitlements to pay back.  Imagine facing this kind of financial problem with your personal budget?  What would you do?  The government has the ability to do something you cannot.  They just print money to pay off the debts.  John Connelly famously told a foreign delegation, “The dollar is our currency but your problem.”

Where do we go, when the milk is all gone?

Is it any wonder that the dollar gets cheaper while gold, silver, and crude oil are moving higher?

"American people have a love-hate relationship with inflation. They hate inflation but love everything that causes it."---William E. Simon

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

MarketToday Home Page

Back to Top