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Growth in U.S. National Debt

Interest-Rates / US Debt May 30, 2012 - 11:40 AM GMT



Best Financial Markets Analysis ArticleThe one inescapable drag on the economy and every American taxpayer or government dependant is the interest obligation paid on the national debt. Indebtedness is nothing new to this country, but the inability to service the public debt stretches over the last half century. This trend is so disturbing that politicians spend every waking hour avoiding the consequences of the ultimate outcome, the demise of the currency. The reserve currency status that has allowed for effortless deficit spending has a day of reckoning. The final collapse of the global empire and superpower will smell more of financial evaporation than of a military defeat.

A brief review of The National Debt: How Did We Get Here?, provides a valuable background.

"Historically, the debt generally increased because of wars and economic depressions. The debt was then reduced after the war or during more prosperous times. This trend was broken beginning about 1918, and definitely so by the end of WW2. The last time the debt was actually reduced was in 1957 when it declined by 0.82%."

What power on earth can reverse this ominous pattern of refusal to balance the books of federal spending? Do not look to the voodoo economics propagated by the free traders over at Redstates. "If the government stops accumulating debt today and dedicates oil from shale to paying off that existing debt, and if we produce just 8% of that oil and sell it on the global market, we can completely pay off our national debt with the proceeds." Stop and evaluate such hooey.

Putting the federal government into the oil fracking business and selling domestic resources on the world market is an obscene economic model. Also, the notion that Congress would go cold turkey and ban any budget that is not in balance is about as probable as closing all foreign military bases because of funding shortfalls. However, the rudimentary reason that the growth in federal debt continues to rise is directed by who owns the obligations.

In Who Owns the U.S. National Debt?, an outline of entities that provide the money that finances the debt is informative.

The largest part (40%) of the Debt Held by the Public is owed to foreign governments and investors. The next largest part (20%) is not really the public, but other government entities, like the Federal Reserve and state and local governments. Another $2.6 trillion (20%) is held by the public through mutual funds, private pension funds, savings bonds or individual Treasury notes. A wee bit is held by businesses, like banks and insurance companies. Here's the breakout:

Foreign - $4.5 trillion

Federal Reserve - $1.4 trillion

State and Local Government, including their Pension Funds - $708 billion

Mutual Funds - $636 billion

Private Pension Funds - $616 billion

Banks - $316 billion

Insurance Companies - $253 billion

Savings Bonds - $188 billion

Other - $1.2 trillion. (As of December 2010. Source: Treasury Bulletin, Ownership of Federal Securities, Table OFS-2)

Even under near zero interest rate returns, the trillions needed to satisfy the hungry appetite of spending continue to flow, even if the Federal Reserve needs to be a buyer of last resort. In a prosperous "main street" domestic economy, tax revenues would increase because the velocity on money expands. Yet taxation alone can never retire the national debt as long as the debt created money of central banking exists.

When the Federal Reserve buys T-bill securities with phony money of their own creation, the monetization function of that purchase, swells the liability. Each succeeding presidential administration expounds upon the previous expenditures. Push back for fiscal responsibility from Tea Party proponents, meets with hostility by the elite political class, and illustrates the resistance for eliminating the freewheeling spending practices.

The growth in the national debt is just the most obvious tally that gets attention. Even the CBO's 2011 Long-Term Budget Outlook promotes the tax more and spend less con game that is a focal point in the current election cycle.

Higher levels of debt imply higher interest payments on that debt, which would eventually require either higher taxes or a reduction in government benefits and services.

Rising debt would increasingly restrict policymakers' ability to use tax and spending policies to respond to unexpected challenges, such as economic downturns or financial crises. As a result, the effects of such developments on the economy and people's well-being could be worse.

Growing debt also would increase the probability of a sudden fiscal crisis, during which investors would lose confidence in the government's ability to manage its budget and the government would thereby lose its ability to borrow at affordable rates. Such a crisis would confront policymakers with extremely difficult choices. To restore investors' confidence, policymakers would probably need to enact spending cuts or tax increases more drastic and painful than those that would have been necessary had the adjustments come sooner.

In the article, Just who will pay the debt?, provides a stark analysis.

"In an era where governmental debt on all levels rises continually and out strips growth in population, the percentage of each citizen’s accrued share to sustain that debt, inevitably must increase. With the incurable appetite of ‘public servants’ to invent new programs, entitlements and agencies, the concept of limited government has long passed into memory. The aftereffect of unfair international trade has shackled the economy with permanent balance of payment shortfalls. The expansion of state and federal bureaucracies of all kinds, coupled with additions to local municipalities, has produced the only growth occupations, virtually immune to layoffs. Contrary to public myth and distortions, inflation in essential necessities has not departed, as the purchasing power of your money buys less."

The only way to resolve the bogus national debt, based upon the central banking counterfeit currency swindle, is to renounce the debt as illegitimate. Nothing else will stop or even slow down the rapid expansion and growth of the national debt clock from collapsing the economy and destroying the currency.

James Hall – May 30, 2012

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