Our Debt is Killing Us–Why America Will Collapse Without Change

Posted: February 24, 2012 in Debt & Deficit

“A man in debt is so far a slave.” ~ Ralph Waldo Emerson

And with these blunt words, we launch into today’s AE missive on U.S. Debt.  After all, people who live in glass houses should not cast stones, and before we stare at Greece like the guy who just got mauled by the lion at the zoo, or gleefully root for a default like bombs over Baghdad, we might want to recognize that Greece and other nations (Italy, Portugal, Japan, etc.) are the canaries in the coal mine.  Until we have our own financial house in order, no one should find the current financial collapse in other nations around the world fascinating, exciting, or informative.  We should find it scary as Hell!

So, let’s take a snapshot in time right now, courtesy of the wonderful website usdebtclock.org:

This website contains fascinating information, and should be viewed regularly if and when you feel the need to vomit in your mouth. We immediately see several things.  Primarily you will tend to view the amount in red under “US NATIONAL DEBT.”  It currently stands at $15.4 trillion and change (I’m rounding today FYI).  This number, for the record, is climbing.  We are spending $3.6 trillion a year and only taking in $2.3 trillion.  As usual, Americans want to have their cake and eat it too.  Typical.  Obviously, as we posted earlier in our discussion on the Federal Reserve and money creation, Congress is more than happy to oblige because its the only way they stay in power.  More on the political implications of our debt later.  For now, let’s stick to the numbers.

So our public debt stands above $15 trillion, but our “US TOTAL DEBT” clears $56 trillion!  This is insane.  It represents all the debt in the whole country: Federal, state, and local government outstanding debt, as well as personal debt (home loans, auto loans, credit cards, etc.).  I will be honest when I’m unsure of something, and I will be honest here: at publication time, our crack research team has not been able to establish whether or not the $56 trillion includes unfunded liabilities such as Social Security, Medicare, Medicaid, our public and private pensions, etc.  In my opinion, the number is too small to include all of that.  So potentially double the actual TOTAL DEBT number to include those other items.

Now I want to address the hardest part for people to get their brains around, because I can hear a lot of you know: “we owe all this money, so what?”  After all, its not like we have to pay it all back right now, right?  This is obviously a debt that gets paid back over time (we discussed earlier in the week how the Treasury takes on debt 30 years at a time–a treasury bond sold this year doesn’t come due until 2042).  This is true.  Just like we don’t pay off a 30-year mortgage in one year, this debt will be serviced over time.  The problem is that we owe so much, we will never pay it off without cutting services or raising taxes, and this is where things will get dicey.

Buried in those numbers above is our GROSS DEBT TO GDP RATIO, which stands at 102%.  This means that we owe more public debt than the value of goods and service our nation produces in a year.  This is equivalent in personal terms to owing more than you make in a year of work.  If you calculate our this ratio using total debt instead of public debt, the number is more like 367%.  This is not good.  Even though we don’t need to service all this debt in one year, the price we pay to borrow money changes with our credit risk.  For some reason, individuals, banks, corporations or countries who would lend the United States money have a hard time mentally lending money to a nation that owes more than it makes?  Would a bank lend you money if you already owned more than you earned?  Well, it might if you were as important to the global economy as the United States is, but this doesn’t make the lending warranted.  Eventually, the price to service our debt will far outreach our own domestic spending priorities, and the amount we’ll need to borrow to stay afloat will outstrip the resources of the nations and entities that lend to us.  And then we’ll get cut off.  And then we’ll be Greece: a nation that has to double or triple its taxes, hack its social safety net in half, lower the minimum wage back to $5.50, and potentially dismantle our army.  Can you imagine what our nation will look like when this happens?

But, please, don’t worry about any of this.  Go back to believing the mainstream media, who tells us every day that Whitney Houston is more important than 30-year bond yields or the destruction of the cradle of Western Civilization.  After all, we’ll all be gone in 50 years, and our kids can fend for themselves.

~ DS

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