Frightening US National Debt Clock

Alchemist

Administrator
Staff member
#2
The debt clock at the top is frightening, but there is something more frightening at the bottom of the page.

"US unfunded liabilities".

According to the site, these exceed $114 trillion.

Some sources put the figure at around $60 trillion.

The government added $5.3 trillion in new financial obligations in 2010, largely for retirement programs such as Medicare and Social Security. That brings to a record $61.6 trillion the total of financial promises not paid for.
U.S. funding for future promises lags by trillions - USATODAY.com

Whether it is $50 trillion or $100 trillion, it doesn't matter.

The US government is in no position to pay such big amounts.

US budget for 2011:

Total revenue $2.17 trillion (estimated)
Total expenditures $3.82 trillion (estimated)
Deficit $1.48 trillion (estimated).

2011 United States federal budget - Wikipedia, the free encyclopedia

Today US government is able to borrow at low cost and thus finance its deficit.

Imagine what would happen if the borrowing rates start to go up as has happened with many European countries.

5% interest on a $15 trillion debt would mean an interest outflow of $0.75 trillion.

7.5% interest on a $15 trillion debt would mean an interest outflow of $1.125 trillion.

If US is unable to reduce its deficit and debt, its cost of borrowing will steadily go up.

Higher interest payments will in turn increase debt and deficit and a vicious cycle will set in.

A stage will come when the interest costs will consume almost all of US government's revenues.

Then the government will be left with two choices - either print money in a big way or just default on its debt and liabilities obligations.
 
#3
Well, yes. It is expected to cross 100% of its GDP by 2012. (File:US Federal Debt as Percent of GDP Color Coded Congress Control and Presidents Highlighted.png - Wikipedia, the free encyclopedia).

Moody and S&P have threatened to cut US credit ratings. (S&P, Moody's threaten to cut US credit rating - Times Of India)

Hedge fund speculators, who are usually 2 steps ahead of every one in the world have started to short US bonds.

I think it is too premature to consider a default risk but the outlook for the American economy is poor on the long run. (I'm speaking of 10 years or so).

Some people compare American debt to say, that of Japan's (which is in excess of 200% of its GDP) but there are certain crucial differences.

1) American debt for the most part is owned by other countries unlike that of Japan which is mostly domestically owned.
2) America has a twin deficit unlike Japan which has a (relatively good) current account surplus.
3) Forget about the American public debt, the citizens of America also take a highly leveraged position unlike Japanese citizens who never (mark that as rarely) take a loan. They almost always prefer to pay in single installment and that too downright.

We will have to wait and see how things unfold.
 
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Alchemist

Administrator
Staff member
#4
Hedge fund speculators, who are usually 2 steps ahead of every one in the world have started to short US bonds.

1) American debt for the most part is owned by other countries unlike that of Japan which is mostly domestically owned.
US is basically running the biggest Ponzi scheme in the world.

It needs to keep borrowing to meet its operating and financial (interest) expenses.

The day it's unable to borrow, the whole system will collapse.

As US debt is held widely by other countries, US's debt problems have now become a systemic risk for the global financial system.
 

Alchemist

Administrator
Staff member
#7
1) American debt for the most part is owned by other countries unlike that of Japan which is mostly domestically owned.
As per Wikipedia, majority of US debt is still locally held. However, proportion of foreign holding is steadily going up every year.

As of January 2011, foreigners owned $4.45 trillion of U.S. debt, or approximately 47% of the debt held by the public of $9.49 trillion and 32% of the total debt of $14.1 trillion.The largest holders were the central banks of China, Japan, and the United Kingdom.The share held by foreign governments has grown over time, rising from 25% of the public debt in 2007 and 13% in 1988.
United States public debt - Wikipedia, the free encyclopedia

Two interesting charts:

File:Estimated ownership of treasury securities by year.gif - Wikipedia, the free encyclopedia

File:Composition of U.S. Long-Term Treasury Debt 2005-2010.PNG - Wikipedia, the free encyclopedia

(In the second chart, note that China and Japan are the biggest holders of US debt).
 
#8
Aye, I had read the wikipedia article. On retrospection, I do admit the wordings I used were misleading.

I should have rather wrote - "the US debt that is foreign owned is much larger (3 times) than that of Japan."

{Since their economies are different I have considered the percentage of their respective GDP (1/3rd of its GDP for the US and 1/10th of its GDP for Japan is foreign owed - actually around 5% of its excess of 200% debt.}

There are 2 considerations though,

1) The Chinese component of the debt is understated. China and the US are not exactly friends. Should the Chinese decide to offload all the debt at once it would be catastrophic for the American economy sending the interest rates spiralling.

2) A good percent (I couldn't get the exact percent - however I read a few article which suggested it) of the domestic debt is owned by the notorious hedge fund managers. They would be the first to dump the bonds (they would not only dump their bonds but take on leverage and sell more) should the signs of default emerge.

All in all, I don't really think the Japanese economy is good but I do believe it is in a better position than the American one.
 

Alchemist

Administrator
Staff member
#9
In spite of the increase in US debt ceiling, equity markets have reacted negatively.

Is the world slowly losing confidence in the US economy and the US dollar?

If that is the case, then US may be headed for an economic disaster.

Till now, US has been able to raise cheap debt from the Chinese, Japanese and other foreign investors because the US dollar is considered a stable currency.

If investors lose confidence in USD, the US government will be forced to borrow at much higher rates and that will further increase the fiscal problem for US.

Also, a weakening dollar would mean high inflation in the economy.

In an high inflation environment, even local investors wouldn't buy US debt unless they get high interest yields.
 
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