This week we look at the Federal deficit, its causation and the fundamental shift in thinking that must take place here in the U.S. to avoid our own version of the fall of Rome. The United States currently owes more than $16,000,000,000,000. That’s sixteen trillion dollars. That is our total debt owed. The government sells new bonds and Treasury Notes to collect enough revenue to cover the interest payments due on the bonds and Treasury Notes that have already been sold that are maturing. This also makes up the funding shortfall from tax collection. The creation of new debt to service old debt is a good idea in a falling interest rate environment. Think of it as refinancing your house at a lower rate. Alarmingly, we are still spending more than we make, which adds to the total debt and our not so distant nightmare.
Global interest rates are at unprecedented lows because other countries are refinancing their own debts using the same methods we are. This is exactly what is going on Europe as they try to save their economic Union. This is the, “easy money policy,” that the news and politicians refer to. The whole point is to be the first one to fill the market place with super cheap loans before interest rates start to turn higher. This is printing money and currency devaluation. We are trying to repay the expensive money we owe from debts we’ve previously incurred with newly printed cheap money. It works in theory until interest rates begin to climb. Think of it as revolving credit card debt that keeps getting rolled over to new trial offers. Once the offers wear out, the holder is stuck with the balance at an incredibly high interest rate.
When this happens to John Doe, he calls a credit counselor who tries to negotiate a settlement with the lender. The alphabet soup of regulation, the ECB, IMF, EFSF and others are shifting the burden of Greece’s debt from the country to the European taxpayers. According to The Telegraph, European taxpayers will own 85% of Greece’s debt by 2015. This is why the fiscally responsible Germans are reluctant to help the spendthrift Mediterranean countries.
European taxpayers want Greece to pay both literally and figuratively. The European credit card counseling sessions include forcing the deepest budget cuts Greece can endure thus allowing them to make their credit card payments. This includes cutting medical care, pensions, education, highway and water systems, etc. This also causes riots in the streets.
The U.S. owes $16 trillion. Nearly $10 trillion (62.5%) of that debt has been sold to U.S. taxpayers. Banks, insurance companies, state and local governments, pension funds, mutual funds, savings bonds and the Federal Reserve depository system account for 8 out of the top 10 holders of U.S. debt. China and Japan round out the top ten at numbers 2 and 4 respectively.
The Congressional Budget Office (CBO) has been issuing warnings for more than a year that the debt path we are on is unsustainable, stating that our budget deficit, our annual shortfall, will surpass $7 trillion within the next 10 years. These deficits are compounded. We add this year’s shortfall to the previous years’ shortfalls to come up with our total deficit. Long story short, our country will continue to spend more than we make for at least the next decade. This is the path to a Grecian outcome.
The United States must get its financial house in order. We cannot afford to fund Medicaid, social security, unemployment, disability, education and defense when servicing our current debt load leaves $.10 of every dollar available for funding. Would you have a problem getting by if $.90 of each Dollar you earned went towards your debts?
There are solutions. Briefly, corporate taxes must be cut so that businesses are encouraged to remain in the U.S, rather than incorporating offshore. Small business regulations and employee expenses must be cut so that American entrepreneurs can get back to generating breakthroughs in innovation. Remember, Microsoft, Apple and Google were all small businesses once. Finally, the balance between the, “haves” and the, “have nots,” must be addressed. I believe that those who make more spend more and should pay more. Benefit programs must be reduced. A consumption or, Value Added Tax (VAT) that places a greater portion of the burden on those who spend the most could equitably offset some of the social program cuts. It would slow domestic consumption and encourage domestic savings as well as proportionately distributing the tax burden by making those who spend more, pay more. We need to act, as we would have our representative government act. Save more, spend less and get our own budgets in balance before the global credit counselors impose their will on our earnings and our country.
This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.
