Thursday, November 12, 2009

One Nation United: Under Debt!

Thursday the U.S. Government posted a record budget deficit of $1.4 Trillion for the fiscal year 2009. (The U.S. Governments fiscal year began October 1 of last year and ended September 30 of this year). With this in mind the U.S. Gross Domestic Product is $14.3 trillion, this equates to approximately a 10% debt-to-GDP ratio. This is the widest U.S. deficit as a share of GDP since 1945, the end of WW2.

Last month the government paid a whopping $14.93 billion in interest payments. Between 2001 and 2008 the total public debit increased from $5.6 trillion to $10.7 trillion. Currently the total public debt is approximately $11.99 Trillion (the sum of yearly debt since we became a nation). This brings our total debt to GDP ratio close to 80%.

It only took 5 1/2 months for Uncle Sam to run up another trillion dollars deeper into debt from September 2008 of $10 trillion to $11 trillion in March 2009, the fastest jump in U.S. history. The Obama administration's four year estimate shows by the end of 2012, the Debt will be around $16 trillion - which amounts to about 100% of the nations GDP for the year.

The Chinese are already starting to get nervous, last summer they were asking for a guarantee of the $1 trillion of U.S. debt they own. The U.S. Government's ability to pay rests in its power to tax you and I; the more debt that is incurred the higher taxes have to become in order for the government to meet its obligations. This has an effect of lowering our standard of living. I can guarantee the Chinese don't care about our quality of life just as we don't care about theirs. They are the investor and will demand to be paid. This reminds me of how Wall Street likes to asses their risky investments: by flipping a coin, "heads we win, tails the tax payer gets nailed". And get nailed we will; imagine if our parents ran up massive credit card bills before we were born and stiffed us with the bill when they died. This is essentially what we are doing to or children and our grandchildren.

Learn more about
us debt.

Total entitlement spending (bills our government must pay) is a function of social security, medicare, medicaid, net interest payments of U.S. debt, and other government programs. At this rate sometime between 2030 and 2040 mandatory spending will exceed all government revenues essentially guaranteeing a perpetual increase in U.S. debt.

My concern is what happens when the interest payments alone exceed tax revenue? De facto bankruptcy? Is this path sustainable in the long run?

What happens if the U.S. dollar looses reserve currency status and China decides to unload the $1 trillion they own into the market? To avoid collapse the Fed would have to raise interest rates higher than they did during the 1970's, this would create stagflation and massive unemployment would be the result. Moreover, if the U.S. did loose reserve currency status and commodities were not pegged to the dollar, other countries would loose its incentive to hold dollars. Could you imagine > $12 trillion dollars being unleashed into the market? Excessive supply of U.S. dollars will create massive inflation and the crash of the dollar - it would be worthless. We would have to carry bags of cash just to buy a cup of coffee. This would cause severe shock in our economic system and would mean the collapse of the American economy. This is worst case scenario and not likely anytime soon. What is our solution to this dilemma? Our youth have inherited this problem and it not be long before we are relying on them to solve our fiscal irresponsibility.
There are 3 types of people in the country, those who save and invest, those who could easily save more but choose not too, and those for whom savings is very difficult. If Fed policy creates strong economic growth and keeps inflation low everyone can benefit. However, if inflation rises people who are less well off will suffer more.

As our founding fathers said - its all up to us, "We the people".

Source 1 Source 2 Source 3 Source 4

Saturday, November 7, 2009


In the mist of the worst recession possibly since the Great Depression, many of us are feeling the squeeze of unemployment, losses of our homes, and bankruptcy. Don't fret a turnaround could be near; Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 3.5 percent in the third quarter of 2009. This by historical standards marks the end of the recession. Nearly at the same time unemployment spiked to 10.2% in October, the highest since 1983. Could this be a paradox? Hardly, unemployment is a lagging indicator in our economy, meaning it will get worse before it gets better. It is obvious that the only way to pull us out of this dire slump without creating massive inflation from all of the stimulus is to create jobs. Put people back to work and lower this ungodly unemployment rate. So, my question to the blogging community is how do we do it? Where is there enough demand to create jobs? Health care? Food service? Job creation has to begin with a demand that everyone has in common.


The goal of this blog is to discuss economic views based on opinion and fact. Its main role will be to direct attention to the triumphs and pitfalls of a capitalist economy, Government (particularly the United States), Wall Street, and how all of this affects individuals. Sometimes I will indulge my inner desire to analyze the Stock Market and confer my opinion of investments.