America’s National Debt Is Our Worst Nightmare

In the wake of this near economic catastrophe, it is amazing how many economic experts and political pundits have tried to give the expression that America’s worst nightmare is the deregulation of Wall Street or healthcare. However the reality is America’s worst nightmare is its national debt. Now there is a difference between national debt and a deficit because a deficit is usually associated with a yearly budget and only means that money that an organization or government has overspent for the current year while debt is the amount of money that an organization owes to both itself and other entities. Simply put suppose you want to spend more money this month than your income. This situation is called a "budget deficit". So you borrow (ie; use your credit card). The amount you borrowed (and now owe) is called your debt. You have to pay interest on your debt. If next month you don't have enough money to cover your spending (another deficit), you must borrow some more, and you'll still have to pay the interest on the loan. If you have a deficit every month, you keep borrowing and your debt grows. Soon the interest payment on your loan is bigger than any other item in your budget. Eventually, all you can do is pay the interest payment, and you don't have any money left over for anything else. This situation is known as bankruptcy.

Each year since 1969, Congress has spent more money than its income. The Treasury Department has to borrow money to meet Congress's appropriations. We pay interest on that huge debt. And now the Treasury is having trouble finding lenders! In fact the annual deficit is this year's spending minus this year's income. If we spend $900B with income of $600B in one year, the annual deficit is $300B. That makes the national debt go up by $300B. The annual deficit is how much the debt increases each year. On any day we can ask how much the annual deficit was over the preceding year and find it by subtracting the national debt a year ago from what it is now. Just take a look at the financial crisis tab from this last year and a half that totaled $5 Trillion. The financial crisis took a heavy toll on the US in just a few months. According to an article published on Forbes.com “CreditSights, a research firm in New York and London, [states that] the U.S. government put itself on the hook for some $5 trillion, so far, in an attempt to arrest a collapse of the financial system.”

The article goes on: “The Fed also took on tens of billions in debt, including $29 billion in debt of Bear Stearns, and made $60 billion of credit available to American International Group (nyse: AIG - news - people ). It is committing $22.5 billion to set up a special purpose vehicle to manage some of AIG’s residential mortgage-backed securities, and it is financing $30 billion of a second fund to hold $70 billion of multi-sector collaterized debt obligations on which AIG wrote credit default swaps. The Treasury, in addition to the $700 billion raised in the Emergency Economic Stabilization Act, agreed to guarantee money market funds against losses up to $50 billion, will inject $40 billion of capital into AIG and is backing the conservatorship of Fannie Mae (nyse: FNM - news - people ) and Freddie Mac (nyse: FRE - news - people ), to the tune of $200 billion. The FDIC, meanwhile, is guaranteeing $1.5 trillion of senior unsecured bank debt.” Now that doesn’t even include the amounts of money thrown toward Chrysler and General Motors in the form of loans but that eventually became debt due to the fact they went into bankruptcy and don’t have to pay back the loans. However, it goes not to mention that General Motors and even a part of Chrysler received additional money from the government even after they went and emerged from bankruptcy so the government owns a part of both companies but a huger chuck of General Motors than Chrysler.

So America has become more a debt 'junkie' - - than ever before with most people stating the national debt at $11 trillion but that doesn’t include all of the nation’s nation such as Medicare and Medicaid, Social Security and other things. Therefore according to the National Debt Awareness Center, the total debt of our nation is $57 Trillion and the highest debt ratio in history. That's $186,717 per man, woman and child or $746,868 per family of 4, $32,104 more debt per family than last year. Last year’s total debt increased $3 Trillion, 8 times faster than GDP. External debt owed foreign interests increased $1.2 Trillion; 79% ($45 trillion) of total debt was created since 1990, a period primarily driven by debt instead of by productive activity.
And, the above does not include un-funded pensions and medical promises. So two (2) great questions: Can the production of debt forever replace the production of goods and savings? and Can Americans forever borrow their way to prosperity?

The easy answer to those questions is “NO WAY!!” The Grandfather Economic Reports, which is a series of picture reports of economic challenges to the future of families and their children, compared to prior generations shows exactly how our economic problems have emerged and what future problems lay ahead for our nation. That is why the Federal Government Debt Report covers just the federal government debt of $10.2, which is $34,868 per child in FY2008 but is at $11 Trillion plus within 8 months of 2009. That is why the National Debt Awareness Center covers all U.S. debt, called Total America Debt (the sum of all recognized debt of federal, state & local governments, international, private households, business and domestic financial sectors, including federal debt to trust funds). Total Debt in America is now $57 Trillion, or $186,717 per man, woman and child. There is $57 TRILLION of DEBT in America, and it is rising rapidly and the economy is 2-3 times more debt-dependent with $36 Trillion DEBT EXCESS compared to prior debt ratios. One graphic on the National Debt Awareness Center website is scary is a chart that shows trends of total debt in America (the red line, reaching $57 trillion in 2008 vs. growth of the economy as measured by national income (blue line). (adjusted for inflation). That debt increased $3 Trillion in the past year. Which line goes up faster, the red debt line or the blue net national income line? Answer: the debt line.

And, that debt line is going up faster and faster than national income! Right? (maybe, like this chart, your own personal or business debt is also going up faster than your own income - - possible?) As mentioned, debt is here defined as all U.S. debt (sum debt of federal and state & local governments, international, and private debt, incl. households, business and financial sector debts, and federal debt to trust funds). Other websites such as National Debt show for the period 1957 to mid 1970s, total debt was increasing close to the growth rate of national income, despite war debt for WW II, Korea and Vietnam. But, in the last several decades total debt has zoomed up, up and away--growing much faster than national income. At the beginning of 2009, total debt was $57 Trillion, which $44.2 trillion private household/business/financial sector debt PLUS $12.8 trillion federal, state and local government debt.

Think about it, last year's total debt of $57 Trillion was 11 times higher than the $5 Trillion debt in 1957 both measured in inflation-adjusted 2008 dollars. Last year's total debt increased $3 trillion, yet national income increased just $328 billion. Federal government debt included added debt owed trust funds had increased $1.5 trillion (16%), household debt increased $56 billion, business debt increased $502 billion (5%), state & local government debt increased $48 billion, and domestic financial sector debt increased $1 trillion (6.4%). Each sector reached a new, all-time record high. It took $9 of new debt to produce but $1 of added national income - a new record. In 2008, 38% ($1.1 Trillion) of the total debt increase was $3 Trillion which is owed to foreign interests and that is up 110% since 2003. Last year's total debt per person was $186,717 (up $11,563 over prior year's $175,154); this compares to $29,722 in 1957 (measured in inflation-adjusted 2008 dollars). Last year's debt per family of four increased by $32,104, to $746,868.

The website U.S. Budget Watch shows debt growth in inflation-adjusted dollars and shows debt as a percentage of net national income which is termed the 'debt ratio'. On its website, it also shows that the 2008 debt of $57 trillion was 499% of national income; the debt ratio in 1957 was 186%. If 2008 debt had been at the 1957 debt ratio then 2008's debt would have been $21 trillion, not $57 trillion which indicates excess debt in America today of $36 trillion. The U.S. Budget Watch website has graphs and charts that show how the debt ratio data plots are nearly flat during the first half of the years shown, indicating debt was growing at approximately the same rate as the economy not faster than the economy. This proves America's economy can grow without increasing debt at a faster pace because it has in the past. Still one has to look at what happened to that trend in the middle of the 1970s where the debt ratio zoomed upward, faster and faster, indicating debt growth way beyond general economic growth - with a new, record high debt ratio each year.

Now if the economy performed with less debt each year per dollar of national income growth, meaning better debt productivity, then we would see a downward trend in debt ratio. But, we don’t and each year more and more we see our debt ration rapidly soar upward. This means the economy has been performing with less debt productivity each year, meaning it requires more and more debt each year to produce a dollar of national income than the year before. Like a drug junkie, the economy demands the generation of more and more debt each year to survive. The debt ratio has now reached 470% of national income which is an all-time high, and shows no sign of even slowing its upward march. The excess debt is even higher than the $36 trillion excess shown on the National Debt Awareness Center website because if a nation's economy were structured to become more productive such that it could grow without increased debt than why can America not grow by normal population and savings growth and labor and equipment productivity without growing debt ratios higher and higher?

More data to look at is that in 1957 there was $1.86 in debt for each dollar of net national income, but in 2008 there was $4.93 of debt for each dollar of national income which is up 165%. This also means this extra $3.08 of debt per dollar of national income produced zilch extra national income. Even worse, in 2008 alone it took $9 of new debt to produce one dollar of national income. So what kind of 'so called productivity' is that? The answer is “Negative Productivity.” Since 1990, 85% of today's domestic financial sector debt was created, as it increased by a factor of 6 times (2.5 times faster than the economy); household debt increased 60% faster. In 2007 there was a new, all-time record high in debt ratios of the household, business, and domestic financial sectors which also records debt ratios owed to trust funds. In FY 2006 the federal government's bite out of trust funds of $328 billion set another record, bringing total trust fund debt to $3.6 trillion, including $1.8 trillion siphoned from the social security trust fund. Average credit-card debt of US households was $9,300 in 2004, up from $2,966 in 1990, according to research firm CardWeb.com that's 214% more debt. The Federal Reserve reported 2008 household credit debt of $2.6 trillion, 18% higher than 2004. Even students learn how to go into debt up to their necks. According to April 2008 Money magazine, not counting borrowing by parents, 2007 college students graduated with an average student loan debt of $21,900 which is a 96% increase after adjustment for inflation since 1993. For those who graduated from a 4-year university with $15,000 or more in debt there was a 20% default rate during the following 10 years. Additionally, student credit card debt soared as universities promote credit cards issued by agencies who kick-back to them. Also since 1990 it is clear the economy was 'driven' almost entirely by the biggest injection of new debt in history, which produced a much diminished lower return in national income per dollar. Just as one hooked on drugs needs ever increasing amounts of drugs to 'survive', it appears America needs ever increasing amounts of new debt to eke out diminishing amounts of growth which is even with 2 wage earners per family. America's total private and government debt is at least 100% higher compared to debt ratios of the recent past.

Therefore the international ownership of U.S. debt has soared to now $13.6 trillion plus. "Foreign interests have more control over the US economy than Americans, leaving the country in a state that is financially imprudent. More and more of our debt is held by foreign countries, some of which are our allies and some are not. “The huge holdings of American government debt by countries such as China and Saudi Arabia could leave a powerful financial weapon in the hands of countries that may be hostile to US corporate and diplomatic interests,” said David Walker, the US comptroller general. (23 July 2007. http://business.timesonline.co.uk/tol/business/markets/united_states/article2120735.ece) America’s Total Debt which is $57 Trillion can be broken down into two parts: $13.6 Trillion owed to foreign interests and $43.4 Trillion owed domestically. From $6.4 trillion of external debt in 2003 to $13.6 trillion in 2008 that is over 100% increase in just 5 years of more than $7 trillion. The $13.6 trillion in 2008 was $3.3 trillion ($32%) higher than 2006, showing a quickening - and representing nearly the increase in America's total debt in 2008.

According to the Federal Government Debt Report federal debt was $10.6 Trillion at the end of 2008, including $3.2 Trillion owed by the U.S. federal government to foreign interests which represents 49% of all Treasury bonds & notes, compared to 15% in the late 1980s. As of 2004, according to Gillespie Research & the Federal Reserve, U.S. financial assets owned abroad included 13% of all stocks and 27% of corporate bonds, and foreign investors & central banks also owned 13% of U.S. government agency debt up from 5% in 1995. However the National Debt website has a graph that shows a rapid quickening of external debt since 2004, meaning the foreign ownership share of stocks, bonds, agencies, etc. that is today higher than ever. Consider this, Fannie Mae and Freddie Mac are the largest suppliers of mortgage funds in America, borrowing extensively on the open market and it has been reported two-thirds of their $1.5 trillion outstanding debt is held by foreign investors, up from one-third in 2002 which is dangerous with a long-term falling dollar exchange rate. Still that was prior to the U.S. government took over majority ownership of Fannie Mae and Freddie Mac but nothing has been said of the foreign investors ownership of the companies and some sources believe they pulled out which caused Fannie and Freddie to melt down to a degree.
Additionally, foreign interests own real estate and factories and some would be surprised to learn that the well-known and respected California-based Pimco, the world's largest bond fund, that many believe is an American firm is in fact a unit of Allianz AG, a German firm. As reported in the International Trade Report, in 2008 the U.S. had a total merchandise trade deficit of $821 billion, while Japan & Germany produced a cumulative trade surplus of $301 billion ($36+$265). That's a whopping $1.1 trillion worse relative trade performance for the U.S., in JUST ONE YEAR - against just 2 nations that also are high-wage nations. And, Japan and Germany actually import a higher percentage of their oil needs than does the U.S., and still relative U.S. trade deficits go on, and on, continually building soaring international liabilities to the benefit of foreign entities, because the American economic system 'refuses' (or does not know how) to produce enough of its needs.

External debt and trend of foreign holdings of federal government debt is covered more extensively in the Total America Debt Report that can be found on the National Debt Awareness Center website. Now we as Americans should not be mad at foreign interests because we are the ones borrowing from others so we can consume beyond our own production and savings, thereby creating unprecedented debts and trade deficits PLUS excessive government spending. While America's debt used to be nearly all owed domestically, increasingly huge portions are now controlled by foreign interests. America is less and less independently in control of its economy and, this is happening on OUR WATCH, not a nice bequest we are creating for our children and grandchildren.

So while facing this accelerating debt challenge, America is already the world's largest international debtor with $13.6 Trillion external debt owed foreign interests. $8.2 trillion in cumulative trade deficits in goods have occurred since 1985, as international trade deficits explode to new records and America depends more and more on the production and savings of others than on itself (see International Trade Report); and, with each citizen carrying on his/her back more state & local government employees than ever before, because their headcounts again increased faster than general population growth; and, personal savings plunged to record lows; and, real median family incomes (Family Income Report) ceased their solid increases after debt ratios took off. With household debt at the highest ratios in history, whereas in previous times one bread winner per family was sufficient to provide for the family, build savings and reduce get-started debt loads - - the family now allocates the 2nd bread winner plus more debt and zero savings and less time for the children to do the same. Now in previous times students graduated from college debt-free to themselves and their parents, because many worked their way via part-time jobs while minimizing consumptive spending but that no longer happens or happens very seldom now days.

The period know as the "financialization" of the economy by debt includes increasing domination by the nation's financial sector of the total capitalization based weight of the S&P index which is a topic discussed as a part of naming debt causes. Still more families than ever before, with every possible adult member in the work force, try to make-up the mounting pressure by turning to more debt and negative savings while more business debt is accumulated despite paying out fewer dividends to shareholders, as well as a much smaller manufacturing base. So with the lowest personal savings rate on record, with the federal government relying more and more on foreign entities to lend it funds to operate and prop up its currency, and with run-away trade deficits, where will this debt monster lead? Does America simply borrow savings of non-Americans until either they stop lending or until America has mortgaged or sold-off all its assets to others? How can this direction be changed - - or am I the only one who does not believe individuals and a nation can, forever, borrow their way to guaranteed continual prosperity and security? Also, am I the only one who believes these trends represent major negatives regarding the future of our children and grandchildren - - in many, many ways?

Well the end game of debt expansion is not here yet. Esteemed Economist Ludwig von Mises stated the endgame brought on by reckless expansion of credit (debt): "There is no means of avoiding the final collapse of a boom brought about by credit (debt) expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit (debt) expansion, or later as a final and total catastrophe of the currency system involved." Does anyone wish to offer guarantees that Dr. von Mises is wrong? Does anyone believe these debt trends can continue forever - without dire consequences?

If we are to prove Dr. von Mises wrong and if we are to make sure that these trends don’t continue forever there are tons of things we must do because this is not a way to run an economy for our children and grandchildren by debt, debt and more debt. There can be little doubt that the only way energy (for example) will be better conserved with reduced dependence on foreign interests is with significantly higher economic (prices) costs and lower consumption. The same goes for debt, a free market (without central-planning via the Federal Reserve to manipulate interest rates) setting significantly higher economic costs (higher interest rates, elimination of tax subsidies on debt, higher bank reserve ratios, etc.) to debtors, until debt ratios fall back more in line with America's past. Perhaps payroll taxes for social security and Medicare should be eliminated with its revenue loss (plus the gap missing for the future) transferred to the equivalent tax on energy and on debt. The U.S. is more debt-dependent than ever and this is not good whatsoever.

America’s national debt is our worst nightmare and this goes beyond just politics but this is economics particularly the economics of deficits and debt. One part of America’s debt that is always talked about but never really discussed more in depth in terms of debt but more so as a political issue that needs to be resolved is Social Security. Currently, contributions to Social Security are greater than payouts because members of the large baby-boom generation are currently in their prime earning years. But the baby-boomers are about to start retiring. In fact, an increase in the Social Security tax was passed just to help fund their retirement. This money should be saved/invested in order to make it easier for the younger generation to support the baby-boomers after they retire. How could this happen? If the rest of the government budget was in balance then the current excess of Social Security contributions over payouts would result in more investment.

Here's how a surplus produces investment: an excess of Social Security contributions over payouts (assuming the rest of the government budget in balance) would be used to reduce outstanding debt. That means buying back bonds. That means more money in the hands of former bond-holders, who clearly were interested in saving the money, not spending it. To save that money they'd buy corporate bonds or stock, or put in the bank, etc., all of which would encourage more investment in real, productive assets. Investment now means increases in productivity in the future. A more productive younger generation would have an easier time supporting the soon-to-be-large number of retirees.

That's why it's important to look at the real deficit that does not include Social Security contributions in excess of payouts. The current deficits indicate that the government is spending far in excess of revenues, thereby more than offsetting intended Social Security saving. And, as the annual total deficit graph shows, the situation is not improving, even after a recession. The reasons for the annual total deficit continuing at near-record levels even after a recession are not hard to find: (1) huge tax cuts; (2) Iraq & Afghanistan war expenditures. Still Social Security is not part of the Federal Budget general fund. It is a separate account and has its own source of income. Social Security payments do not go into the general fund, they go in the Social Security trust fund, and should NOT be counted as general revenue. The trust fund is supposed to be used to pay future benefits. But currently, there is more being paid into the Social Security Trust Fund than is being paid out to beneficiaries. What's left over is routinely being "borrowed" and used as if it were general budget revenue. Government agencies are using that money and are promising to pay it back (IOUs). All of the money in the Social Security Trust Fund has been spent! That's part of the National Debt. So Social Security is just a very large tax collection tool.

So we have to beware the term "Social Security Surplus"; there is no such thing. Social Security is a Ponzi Scheme, there is never more in the Trust Fund than will ever be needed. Social Security will need to be fixed. Here is a debate page to discuss it. And here is more information on the Root Problem with Social Security. Still, social security, Medicare and Medicaid are all parts of the problem our nation’s national debt. They are not usually included in most debt calculations but the truth of the matter regardless if you believe the nation’s debt is at $11 Trillion plus and counting or $54 Trillion plus and counting, we have a serious problem in this nation when it comes to debt and this is our worst nightmare as we don’t deal with it head on right here, right now. The more time that is wasted on dealing with the national debt, the larger it grows and more out of control it gets. Now is the time to deal with it so we don’t continue to pass much of it along to our children, our grandchildren and our grandchildren’s children. We must change our society and the way we deal with things in this nation.

America’s worst nightmare is our national debt and it only continues to get scary and scary with each passing second, minute, hour, day, week, month and year. Let’s fix it now once and for all.

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NOTABLE QUOTES
"For society as a whole, nothing comes as a 'right' to which we are 'entitled'. Even bare subsistence has to be produced.... The only way anyone can have a right to something that has to be produced is to force someone else to produce it... The more things are provided as rights, the less the recipients have to work and the more the providers have to carry the load." Thomas Sowell, quoted in Forbes and Reader's Digest.

According to Mr. Kneeland, "...all dollars come from the people. Where do [you] think Coca-Cola gets the money to pay its taxes, Exxon gets its money to pay the Exxon Valdez fines, Denny's gets the money to pay its Justice Department fines, or even Microsoft gets the money to defend itself? It all ultimately can come from only one place, and that's from individuals." ED: When you buy a product, the price of that product has to cover ALL the costs to get that product to you.

"A politician cannot spend one dime on any spending project without first taking that dime from the person who earned it. So, when a politician votes for a spending bill he is saying that he believes the government should spend that particular dollar rather than the individual who worked for it." Neal Boortz.

"There is no such thing as government money - only taxpayer money." William Weld, quoted in Readers Digest.
"We hear sad complaints sometimes of merciless creditors; whilst the acts of merciless debtors are passed over in silence." - William Frend, 1817

"I place economy among the first and most important virtues, and debt as the greatest of dangers to be feared." - Thomas Jefferson"

"The decline of great powers is caused by simple economic over extension." The Rise and Fall of the Great Powers, by Paul Kennedy

"There is no means of avoiding the final collapse of a boom brought about by credit (debt) expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit (debt) expansion, or later as a final and total catastrophe of the currency system involved." - Ludwig von Mises

No generation has a right to contract debts greater than can be paid off during the course of its own existence." - George Washington to James Madison 1789

"Growing domestic and international debt has created the conditions for global economic and financial crises.” Bank for International Settlements June 2005

Sources:
Deficits Do Matter www.deficitsdomatter.org

Federal Budget Spending and National Debt Awareness Center www.federalbudget.com

National Debt http://zfacts.com/p/461.html

U.S. Budget Watch--The Committee for a Responsible Budget www.usbudgetwatch.org

U.S. National Debt Clock www.usdebtclock.org