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U.S. Debt Crisis Built on Kindness of Strangers and a Broken Promise

Politics / US Debt Aug 13, 2011 - 07:10 AM GMT

By: Richard_Mills


Best Financial Markets Analysis ArticleThe public debt is the money borrowed by the US federal government. The government borrows the money through the issue of securities by the Treasury and other federal government agencies.

Public debt has two parts:

  • Intragovernmental holdings - Treasury securities held in accounts administered by the federal government ie the Social Security Trust Fund
  • Debt held by the public - Treasury securities held by investors outside the federal government ie Federal Reserve and state and local governments

US debt increased by $1 trillion in 2008, $1.9 trillion in 2009, and $1.7 trillion in 2010. As of August 3, 2011, the debt was $14.33 trillion dollars, of which $9.78 trillion was held by the public and $4.56 trillion was intragovernmental holdings.

Standard and Poor's downgraded the credit rating of the US by one notch from AAA to AA+ on August 5, 2011. The long term outlook is negative and the rating could be lowered further, to AA, within the next 2 years.

"We were downgraded because of years of reckless spending, not because concerned Americans demanded we get our finances in order. The Washington establishment has spent us into near default and now a downgrade, and here they are again trying to escape responsibility for their negligence in handling the economy." Ron Paul US Congressman (R)

The US national debt is $14.33 trillion - almost 70% of that debt is owned by Americans. The $4.5 trillion foreign owned component of the US national debt is mostly owned by Asian economies.

America's largest creditors:

  • Social security trust fund: $2.67 trillion, 19%
  • The Federal Reserve: $1.63 trillion, 11.3%
  • China: $1.16 trillion, 8%
  • US households: $959.4 billion, 6.6%
  • Japan: $912.4 billion, 6.4%
  • State and local governments: $506.1 billion, 3.5%
  • Private pension funds: $504.7 billion, 3.5%
  • United Kingdom: $346.5 billion, 2.4%
  • Money market mutual funds: $337.7 billion, 2.4%
  • State, local and federal retirement funds: $320.9 billion, 2.2%
  • Commercial banks: $301.8 billion, 2.1%
  • Mutual funds: $300.5 billion, 2%
  • Oil exporting countries: $229.8 billion, 1.6%

Asian's are buying US Treasuries to stem gains in their currencies against the dollar, they need a strong dollar versus their currency to keep Americans buying their exports. This will not change, at least not on China's part, until that country's economy is supported by internal consumption rather than relying on exports.

America's real problem isn't foreign held debt, although the US does owe almost a third of overall debt to foreign states. China and Japan (the US's third and fifth largest creditors) together hold only 14.4% of US debt - American's debt to themselves, approaching ten trillion dollars, is over eight times the amount owed China.

China, at $1.16 trillion, is actually the third largest individual creditor to the U.S., behind the Social Security Trust Fund and the $2.67 trillion the government owes it - in second place is the $1.63 trillion the Federal Reserve has recently purchased.

The budget shortfall, the deficit, for the first ten months of 2011 already exceeds the $900 billion in discretionary savings Congress agreed to find over the next decade in the just concluded debt deal - the July deficit alone was $132 billion. Even the "super committee" that is charged with lowering the deficit by $1.2 trillion over ten years (above and beyond the $900 billion) is only going to come up with one year's worth of deficit spending savings and in total we are talking much less than two years worth of deficit spending out of ten, thats if such diverse committee members can compromise in front of an election year.

The government's deficit is now $1.103 trillion for fiscal year 2011, which has almost another two months to run till Sept. 30.


According to the Bureau of Economic Analysis (BEA) Medicare and Medicaid spending, in the second quarter of 2011, rose to a combined annual rate of almost $992 billion. Medicare's unfunded liability alone amounts to $353,350 per U.S. household. Total entitlements spending plus interest on the federal public debt account for about two-thirds of the federal budget.

The largest problem in America is the massive debt bomb called the Social Security Trust Fund and the $2.67 trillion the government owes it. America's population is aging, 78 million baby boomers are retiring over the next 15 years meaning massive increases in federal transfer payments.

The biggest holders of US debt are Americans - the majority of money Americans owe is owed to themselves. This self owed debt is going to continue to increase because social benefit cupboards have been stripped bare, the monies have been removed and spent, all that's left are IOU's.

This is not simply a matter of today's $2.67 trillion dollars, as serious as that number is, its dwarfed by the hundreds of trillions of dollars America is committed to spending on social benefits over the coming decades.

It would seem to this author, because foreigners own less than a third of America's debt, that Americans are not indebted to the kindness of strangers after all, at least not yet.

Future Social Security obligations, the Federal Reserve and Ben Bernanke secretly giving away $16 trillion dollars, pork barrel politics, more rounds of quantitative easing (QE3,4 etc) and US Defense spending means huge budget deficits for years to come. This has serious implications for the value of the US dollar and the price of precious metals.

But there is more:

  • US low interest rates (a reality for at least two more years) and the high rate of inflation are causing negative real yields for bond holders

  • A possibility of further credit downgrades

  • Declining public confidence

  • Global debt crisis - European Central Bank (ECB) intervening in the bond market, Bank of England to add stimulus, Japan and Switzerland are intervening in their currency markets because of overvaluation concerns

The gold price today would have to be US$2358 to match gold's nominal high in 1980. The US dollar is a broken promise, people are going to continue to buy more gold and silver. The seasonally strong period for gold and gold stocks is right around the corner.

Mine production costs are dropping, with gold trading around $1750 and silver at $38, gold and silver miners are going to look pretty good to investors next quarter. Junior precious metal companies, the owners of the worlds next mines, are going to have their turn in the spotlight and should be on every investors radar screen. Are they on yours?

If not, maybe they should be.

By Richard (Rick) Mills

If you're interested in learning more about specific lithium juniors and the junior resource market in general please come and visit us at Membership is free, no credit card or personal information is asked for.

Copyright © 2011 Richard (Rick) Mills - All Rights Reserved

Legal Notice / Disclaimer: This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Richard Mills has based this document on information obtained from sources he believes to be reliable but which has not been independently verified; Richard Mills makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Richard Mills only and are subject to change without notice. Richard Mills assumes no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this Report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, I, Richard Mills, assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information provided within this Report.

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