Pretty Clear

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.

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.

Higher taxes, or reduced federal benefits and services — or a combination of both — may be the inevitable consequences.

The debt is complicating efforts by President Barack Obama and Congress to cope with the worst recession in decades as stimulus and bailout spending combine with lower tax revenues to widen the gap.

Interest payments on the debt alone cost $452 billion last year — the largest federal spending category after Medicare-Medicaid, Social Security and defense. It's quickly crowding out all other government spending. And the Treasury is finding it harder to find new lenders.

The United States went into the red the first time in 1790 when it assumed $75 million in the war debts of the Continental Congress.

Alexander Hamilton, the first treasury secretary, said, "A national debt, if not excessive, will be to us a national blessing."

Some blessing.

Since then, the nation has only been free of debt once, in 1834-1835.

The national debt has expanded during times of war and usually contracted in times of peace, while staying on a generally upward trajectory. Over the past several decades, it has climbed sharply — except for a respite from 1998 to 2000, when there were annual budget surpluses, reflecting in large part what turned out to be an overheated economy.

The debt soared with the wars in Iraq and Afghanistan and economic stimulus spending under President George W. Bush and now Obama.

The odometer-style "debt clock" near Times Square — put in place in 1989 when the debt was a mere $2.7 trillion — ran out of numbers and had to be shut down when the debt surged past $10 trillion in 2008.

The clock has since been refurbished so higher numbers fit. There are several debt clocks on Web sites maintained by public interest groups that let you watch hundreds, thousands, millions zip by in a matter of seconds.

The debt gap is "something that keeps me awake at night," Obama says.

He pledged to cut the budget "deficit" roughly in half by the end of his first term. But "deficit" just means the difference between government receipts and spending in a single budget year.

This year's deficit is now estimated at about $1.85 trillion.

Deficits don't reflect holdover indebtedness from previous years. Some spending items — such as emergency appropriations bills and receipts in the Social Security program — aren't included, either, although they are part of the national debt.

The national debt is a broader, and more telling, way to look at the government's balance sheets than glancing at deficits.

According to the Treasury Department, which updates the number "to the penny" every few days, the national debt was $11,518,472,742,288 on Wednesday.

The overall debt is now slightly over 80 percent of the annual output of the entire U.S. economy, as measured by the gross domestic product.

By historical standards, it's not proportionately as high as during World War II, when it briefly rose to 120 percent of GDP. But it's still a huge liability.

Also, the United States is not the only nation struggling under a huge national debt. Among major countries, Japan, Italy, India, France, Germany and Canada have comparable debts as percentages of their GDPs.

Where does the government borrow all this money from?

The debt is largely financed by the sale of Treasury bonds and bills. Even today, amid global economic turmoil, those still are seen as one of the world's safest investments.

That's one of the rare upsides of U.S. government borrowing.

Treasury securities are suitable for individual investors and popular with other countries, especially China, Japan and the Persian Gulf oil exporters, the three top foreign holders of U.S. debt.

But as the U.S. spends trillions to stabilize the recession-wracked economy, helping to force down the value of the dollar, the securities become less attractive as investments. Some major foreign lenders are already paring back on their purchases of U.S. bonds and other securities.

And if major holders of U.S. debt were to flee, it would send shock waves through the global economy — and sharply force up U.S. interest rates.

As time goes by, demographics suggest things will get worse before they get better, even after the recession ends, as more baby boomers retire and begin collecting Social Security and Medicare benefits.

While the president remains personally popular, polls show there is rising public concern over his handling of the economy and the government's mushrooming debt — and what it might mean for future generations.

If things can't be turned around, including establishing a more efficient health care system, "We are on an utterly unsustainable fiscal course," said the White House budget director, Peter Orszag.

Some budget-restraint activists claim even the debt understates the nation's true liabilities.

The Peter G. Peterson Foundation, established by a former commerce secretary and investment banker, argues that the $11.4 trillion debt figures does not take into account roughly $45 trillion in unlisted liabilities and unfunded retirement and health care commitments.

That would put the nation's full obligations at $56 trillion, or roughly $184,000 per American, according to this calculation.

___

On the Net:

Treasury Department "to the penny" national debt breakdown: http://tinyurl.com/yrxrsh

Peter G. Peterson Foundation independent assessment of the national debt: http://www.pgpf.org/

"Deficits do Matter" debt clock: http://tinyurl.com/l6mvjb

(Hat tip to Bruce)

Comments

[ArtE]

If this is a problem, when does it really become a problem that affects us? Japan is out there at about 200% of GDP and no seems to worry.

I assume we will furiously inflate our way out of the problem or ?

[darkcloud]

Michael,

Great post here. If the world is in catastrophic mode because of unbridled debt and leverage, how can anyone truly believe the same won't apply to governments and central banks following the same stupid strategy? What a no-brainer - "pretty clear" is an appropo title.

Continued thanks for your great posting, interviews and efforts to inform.

[sackerson]

... and it didn't help Joe Six-pack:

http://theylaughedatnoah.blogspot.com/2009/07/where-did-funny-money-go.html

[Martin]

The AP article does not contain much news, but it is significant in that it seems to suggest that signs of uneasiness are filtering through to the mainstream media. Up to now, the view generally held was that the U.S. could easily borrow themselves out of trouble. I would suggest that the present recession, however painful it is, is the result of overspending (and overspending of borrowed money). Trying to get back to positive GDP-growth by borrowing and spending even more isn't going to work. Perhaps even more worrying: history suggests that political power, in the long run, has to be founded on a productive economy. (See, for instance, Kennedy's The Rise and Fall of the Great Powers.) With such large numbers of U.S. jobs having been outsources and such large number of U.S. jobs disappearing every month, the productive base of the U.S. seems to be deterioriating steadily. Would any reader care to comment?

[farang]

[Alexander Hamilton, the first treasury secretary, said, "A national debt, if not excessive, will be to us a national blessing."

Some blessing.]

Hamilton, a Rothschild agent, and the one pushing for a "national" (Federal Reserve)bank...go figure, eh? No wonder he is considered the father of the Republican party: No scruples. No Morals. Bought and paid for Rothschild whore.

Yes Martin, I would care to comment: the scenario you describe was and remains the plan: send capital to low wage regions. GM is making record profit...from it's Shanghai operations. We've bailed out a multi-national corporation, so Chinese can stay employeed.

Another part was the cutting of taxes for the very top 1% income earners, funneling more of the nations wealth into fewer and fewer hands, while eliminating organized labor, so they could get better quarterly reports, without the basic common sense Henry Ford had to pay his workers enough to afford the products they make.

That "low labor wage" philosophy: it will be China's undoing too, eventually.

Those riots in China? More than just ethnic strife: all was fine there until the bubble burst world-wide. Unemployment has that effect on the distressed and hungry.