Avalanche Warning

Who is going to pay for the United States’ and to remainder of the world’s governments unrestrained splurge of government spending?

Currently, as I write this, the U.S. national debt sits at $16,015,769,788,215.80.

The 2011 US GDP was $15,094,000,000,000.00.

This is not news.  This was entirely foreseeable as the President, together with single party rule in Congress during 2008 through 2010, failed to address a single budgetary concern or make any attempt to control the budget and our burgeoning national debt.  This election season has seen a lot of focus on the deficit which is just a single year’s shortfall in terms of expenditures against tax revenue.  What needs to be talked about though is how the national debt is a greater concern.

Just paying the interest on our national debt last year (2011) cost the United States $454,393,280,417.03.  That is approximately 3.01% of our GDP, just to service the national debt’s interest payments, and a lot of our debt is issued in terms of bonds and t-notes that come due on a revolving basis for interest payments, so that is not the whole story.

As of today, treasury yields (which is basically the future interest rate paid) are indexed at 1.59% for a 10-year term, 2.3% for a 20-year term, and 2.69% for a 30-year term.  These rates are being kept artificially low however.  The Federal Reserve Board has been purchasing these debt securities at lower yields to prevent the Department of Treasury from failing to secure buyers for the debt at manageable interest rates (WSJ).  The long term outcome of this can not be positive as it is the left hand hiding what the right hand is doing and is basically just a large scale cost-shifting.  The loser will be you and I as our purchasing power, via the value of the dollar, will decline as this continues.

Basic market economics dictate that if an investor thinks that buyer a security (a treasury bill, bond, etc) is not worth the risk, then the seller must raise it’s value by increasing it’s yield (interest paid upon the completion of the term).  In short, if the Fed suddenly finds themselves unable to keep hiding the tremendous debt problem that the US finds itself in then we will see sales of treasuries at increasingly larger interest rates as investor confidence requires greater payouts in order to entice buyers.  This will cause the costs of debt servicing to rise, and for a country already running deficits in excess of a trillion dollars, suddenly the US does not look able to pay it’s own debts in the long run.

Rock – Us – Hard place

The only way out of this is for us to immediately stop spending more on government programs and services than we can immediately pay for with current tax revenues (balanced budget).  The problem we must then face is how to pay down our debt so our own interest rates don’t kill us.

Author’s Note: For a much better understanding and explanation of this situation, I highly recommended everyone read Karl Denninger’s Market Ticker and his book Leverage.


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