Economic reporting in the U.S. is very deceptive. But if you dig deep enough, you can put the pieces together. For example, we are told that U.S. Sovereign debt is 20.6 Trillion dollars as of today, and U.S. Federal tax revenue is $3.3 Trillion dollars (http://www.usdebtclock.org/). America’s near $20 trillion of gross federal debt is already twice the annual revenues collected by all the world’s governments combined.
The problem with this US debt figure is that when it is compared to other sovereign debt, it’s a truly a deceptive number. Other countries INCLUDE local government debt in their national figures, but U.S. does NOT. Why? Because, central governments are guarantors of local government debts. That applies to the U.S. too (although technically one could argue against it). In any event tax payments (both federal and state) must fund both (federal and state debt). And therefore, to make sure we are comparing apples with apples, U.S. debt figures should ADD IN, local government debts i.e. another $4.035 Trillion dollars!
So, in fact the total US government debt figure is closer to $24.6 Trillion dollars. US GDP, by the way is $19.7 Trillion dollars. This 126% of US GDP (this is a higher figure than almost every nation in the world!
But, wait for it. The US government can NOT use ALL tax revenue to simply pay off debt. It has other commitments like Social Security and Medicare parts A, B, and D, and Federal employee/veteran’s benefits that it must fund out of current funds. These commitments (entitlement programs) are, by the way, inflation adjusted. These commitments or liabilities (on the federal government’s balance sheet) add up to $111.8 Trillion dollars. Funding these entitlements add up to about 53% of U.S. federal government expenditures. This is $1.8 Trillion dollars. And it leaves $1.5 Trillion dollars (out of total federal tax revenue of $3.3 Trillion dollars) for other expenditures – including by the way, paying interest (and principal) on national debt. Under virtually every economic scenario, funding for entitlements ($1.8 Trillion dollars) will INCREASE as a portion of federal expenses. Very soon America will have 75 Million retirees, and much fewer working age tax payers. As US population ages, and huge numbers of Americans retire, the US government will suddenly be faced with a huge bill! Money it simply does NOT have.
So in essence, we have $137 Trillion dollars in liabilities, against a total US national asset base of $134 Trillion. I mean, if Americans sold everything in America – all the land, all the buildings, all the businesses, the total value of those assets at TODAY’s market prices is $134 Trillion dollars.
The U.S. economy is therefore functionally bankrupt.
And, by the way, there isn’t enough money in the world to bail the U.S. out if the U.S. defaults or collapses. Don’t believe me, well here’s how big the world economy, (GDP) is: $ 79 Trillion dollars.
Despite being bankrupt, what has saved the U.S. economy is the willingness of bond holders – i.e. mainly foreign governments to receive 1.4% interest on their U.S. government bonds. Interest payment on U.S. federal debt was $266 Billion dollars last year.
One principal reason for this, is that the U.S. dollar is a global fiat currency for trade. Governments around the world keep their cash in dollar denominated accounts so they can pay their bills – for things like Oil, and other commodities.
The big question going forward is – will people keep buying U.S. debt? Because if the market for U.S. treasury bills collapses, then this Ponzi scheme is dead. If the market collapses, the U.S. will have to increase interest rates on the bonds to persuade people to buy!
Who are the largest buyers of U.S. Treasury bills?
- Foreign governments and investors hold nearly a quarter of it – $6 Trillion dollars
- Intra-governmental Holdings. This is the portion of the federal debt owed to 230 other federal agencies. It totals $5.6 trillion, almost 20 percent of the debt.
- Federal Reserve – $2.465 trillion
- Mutual funds – $1.671 trillion
- State and local government, including their pension funds – $905 billion
China owned $1.2 trillion of U.S. debt. It’s the largest foreign holder of U.S. Treasury securities. The second largest holder is Japan at $1.1 trillion. Both Japan and China want to keep the value of the dollar higher than the value of their currencies. That helps keep their exports affordable for the United States, which helps their economies grow. That’s why, despite China’s occasional threats to sell its holdings, both countries are happy to be America’s biggest foreign bankers. China replaced the United Kingdom as the second largest foreign holder on May 31, 2007. Ireland is third, Brazil is the fourth.
However, as China’s economy expands, and it establishes strategic trade links with Europe – AND as the Chinese government increases its own debt burden – there will be ‘competition’ for U.S. treasury bills. China’s economy has been ‘bubbling’ for some time. Real estate assets have been overvalued. In turn, China’s central government has been borrowing at an accelerating pace to maintain growth.
Zerohedge.com reported last year that “China has been driven by yet another round of debt indulgence. Debt in China has grown by $4.5 trillion over the past 12 months, by far the highest amount of debt creation globally as compared to $2.2 trillion in the US, $870 billion in Japan and $550 billion in the euro area. Indeed, China on its own has added more debt than the US, Japan and the euro area combined.”
Russia and China are unifying across major industrial sectors – including energy, to trade in non-USD other currencies.
This is a major national security issue! If foreign governments undermine the value of the U.S. dollar as the fiat currency for trade and start depositing funds in other banks – then the market for U.S. treasury bills will die. If interest rates on U.S. treasury bills rises, then there will be tremendous pressure on the U.S. federal budget.
Now, the question of the moment. With dysfunction in Washington, would you lend the U.S. government money? The people that run the U.S. government are America’s greatest enemies. They are systematically undermining the very solvency of the United States. Do they understand how precarious this situation is?
Here is my take on a few major policy issues facing the U.S. government:
We have almost 1 Million tax paying “Dreamers” in the U.S. People that the United States has invested in with education, housing, school lunches … you name it … from the age of 2 to 22! And the Republicans want to send them back to the country of their parents…. Instead of simply letting them become partners in paying off the U.S. debt burden.
Given the U.S. debt burden, given America’s balance sheet – supporting Dreamers is a no-brainer.
Trump is busy picking fights with North Korea, Iran … arming Ukrainians now … It’s total idiocy. How did we get into this debt mess? Wars!! The Bush Wars!! We borrowed 7 Trillion dollars after 9/11 to fund wars or deal with the consequences of these wars. Do we really want to borrow more money for more wars?
I know there is an argument for Trump to generate a bout of inflation by starting a pissing match in the Persian Gulf – by driving oil prices through the roof. And this, in turn, would diminish the value of the debt. But, there is no guarantee that a war would be short-lived, and low cost. A war in the Persian Gulf or with North Korea would more than likely draw in both China and Russia on the opposite side to the United States. This in turn would likely diminish China as a buyer of U.S. treasury bills. Its really a dumb idea. This is a very high-risk strategy. Not smart or sensible.
Given the U.S. debt burden. Given America’s balance sheet – more war is idiotic.
Immigration and the U.S. Fertility Rate:
America’s liabilities are ballooning while its tax base is shrinking.
- America’s fertility rate is now at about 1.85 births per woman. To maintain a stable population requires at least 2.1 births per woman. The U.S. has been at or below the replacement fertility rate since 1972.
- Between 2017 and 2029, the age 65-plus population will grow almost seven times faster than the overall population. Each day, 10,000 American baby boomers, on average, sign up for Social Security.
- In 2015, 2.8 workers paid for one retiree’s benefits, down from 3.3 in 2007. The ratio is expected to slide to 2.2 in 20 years.
So how are we going to deal with declining fertility rates and the U.S. tax base, at a time when liabilities are ballooning? Immigration!!
Only way out of Hell
There is only one way out of debt hell – the U.S. needs to continue to be the world’s leading economy. The U.S. must remain the innovation hub of the world. We need more trillion-dollar companies like Apple and Google. The U.S. must grow its economy and maximize the number of high earning citizens with quality high value jobs. This means investing in education and technology. High rates of high-school dropouts, and poor performance in math and sciences is problematic. Stopping immigration (the very source of America’s success) is idiotic. Don’t for a second think that we can create trillion-dollar companies like Apple or Google without massive immigration. Steve Jobs was a son of a Syrian (Muslim) immigrant. Google was founded by immigrants.
Anyway, you look at it, Washington’s dysfunction is very problematic. It makes buyers of U.S. treasury debt nervous. It also makes future immigrants nervous. Our leaders in Washington appear to be America’s greatest enemies.