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Bringing the Empire of Debt to its Knees

Bringing the Empire of Debt to its Knees.

Addison Wiggin

Posted Feb 7, 2014.

“The relentless credit deluge in America is beyond belief…” Kurt Richebächer bemoaned in 2005. “Credit growth, financial and nonfinancial, in the United States has effectively run riot in the short time since 2000.”

Fast-forward nearly a decade and we have no doubt Kurt would express himself with even greater discontent if he were with us now. From CNN Money this afternoon:

“The CBO projects that under current policies, public debt will reach $21 trillion — or 79% of GDP — by 2024. That would be its highest level in more than 75 years and would leave debt at nearly double its long-term average of 40% of GDP.”

What would Kurt say if he were here today? Probably that a nation, no less than you or I, should earn its money before spending it. And that the U.S. may very well thrive as its public and private debt climbs ever higher… yet it’s probably in spite of indebtedness, not because of it…

…the size of its interest payments is as likely to bring the empire of debt to its knees as anything.

At writing, the national debt sits at $17.3 trillion. The debt limit will need to be raised, according to Treasury Secretary Jacob Lew, lest the U.S. default on some of its obligations. That’s old hat.

What’s more interesting is the interest on the debt. After all, the size of its interest payments is as likely to bring the empire of debt to its knees as anything.

According to the CBO, the U.S. will shell out “only” $233 billion to service its debt this year. That’s a little more than 1% of GDP. At the same time, the federal deficit is set to decline this year and next — to nearly half the amount of 2009′s deficit.

We would humbly posit, however, that digging yourself deeper into a hole isn’t an enviable position… no matter how slowly you dig. This is especially true while interest rates are so low.

What happens when they go back up, as they inevitably will?

The answer, according to the CBO report, is that interest payments will make up the biggest portion of the federal deficit. “By 2024, it will reach $880 billion, or 3.3% of GDP,” reports CNN. That will be 80% of the projected $1.1 trillion deficit a decade from now. That amount rivals what we spend on Medicare alone right now.

It sounds like the end of the road for the ol’ US of A… then again, what do we know? When we produced our film I.O.U.S.A. in 2007, the federal debt was about $9 trillion. Today, it’s nearly double that. If we’ve learned anything, it’s that these things can go on a lot longer than you’d figure. Alas, for all of our uncertainty about the journey’s time frame… the destination is certain.

“For decades,” Dr. Richebächer told us in France two years prior toI.O.U.S.A., “one dollar added to GDP in the United States was tied to $1.40 in additional debt. But all that changed in the 1970s. Since then, the debt-to-GDP growth relationship has skyrocketed. Now for one dollar of additional GDP, there is $4 in additional debt.”

How Much Debt it Takes to Produce $1 of Additional GDP

The good doctor might have been engaging in a bit of hyperbole. Comparing the GDP numbers from the Commerce Department with the total credit market debt as reported by the Federal Reserve, it took $3.20 in debt to produce $1 of additional GDP at the time of that interview. But the acceleration since the 1970s is undeniable.

The good news — if that’s what you can call it — is that the upward spiral reversed as the “official” recession ended in mid-2009. We’re now back to $3.44 — the level where it was when Dr. Richebächer died, in August 2007. It’s bad news when you consider that much of that debt has been frittered away on entitlement programs, which have exacerbated the problems they were created to solve.


Addison Wiggin
for The Daily Reckoning

Ed. Note: In the Daily Reckoning email edition, from which this essay was taken, Dr. Marc Faber followed Addison’s musings with an exploration of some specific instances of government failure. Specifically, schemes like the war on poverty… a decades-long mission to flush $20 trillion down a massive toilet. But these essays are just one benefit of reading The Daily Reckoning email editionbefore it hits the Daily Reckoning website… Readers of the email edition are also treated to several chances to discover real, actionable profit opportunities every single day. So don’t wait. Get the full story by signing up for The Daily Reckoning, for FREE, right here.

Addison WigginAddison Wiggin is the executive publisher of Agora Financial, LLC, a fiercely independent economic forecasting and financial research firm. He’s the creator and editorial director of Agora Financial’s daily 5 Min. Forecast and editorial director of The Daily Reckoning. Wiggin is the founder of Agora Entertainment, executive producer and co-writer of I.O.U.S.A., which was nominated for the Grand Jury Prize at the 2008 Sundance Film Festival, the 2009 Critics Choice Award for Best Documentary Feature, and was also shortlisted for a 2009 Academy Award. He is the author of the companion book of the film I.O.U.S.A.and his second edition of The Demise of the Dollar, and Why it’s Even Better for Your Investments was just fully revised and updated. Wiggin is a three-time New York Times best-selling author whose work has been recognized by The New York Times MagazineThe EconomistWorthThe New York TimesThe Washington Post as well as major network news programs. He also co-authored international bestsellers Financial Reckoning Day and Empire of Debt with Bill Bonner.

Lew Urges Debt-Limit Rise as U.S. Nears Borrowing Ceiling – Bloomberg

Lew Urges Debt-Limit Rise as U.S. Nears Borrowing Ceiling – Bloomberg.

By Derek Wallbank and Kasia Klimasinska  Feb 8, 2014 12:00 AM ET

Treasury Secretary Jacob J. Lew urged Congress to raise the debt ceiling as soon as possible, saying U.S. borrowing authority may not last past Feb. 27.

Extraordinary measures begun by the Treasury to remain under the debt limit “are likely to be exhausted in less than three weeks,” Lew said yesterday in a letter to House Speaker John Boehner, an Ohio Republican.

House Majority Leader Eric Cantor’s schedule for votes for next week includes possible consideration of legislation related to the debt limit. No bill has been introduced.

House Republicans say they want concessions in exchange for raising the debt limit, though they’ve been unable to agree on exactly what. Options include averting cuts in doctors’ Medicare payments and restoring cost-of-living adjustments for military retirees that were reduced in a December budget deal, said three House Republican aides who sought anonymity.

A suspension of the U.S. debt limit, enacted by Congress in October, expired yesterday. Lawmakers haven’t ruled out a debt-limit boost without conditions if Republicans can’t get enough support for a plan.

“It would be a mistake to wait until the last possible minute to act,” Lew said in his letter to Boehner. After the extraordinary measures run out, any “cash balance would be exhausted quickly,” he said.

Congress plans to be out of session the week of Feb. 17 and will return to Washington the week of Feb. 24.

Business Groups

Business groups are encouraging lawmakers to act to raise the debt limit. Democrats including President Barack Obama and Senate Majority Leader Harry Reid of Nevada insist that it be raised without conditions.

“Any default by the federal government on its debts would cause devastating, long-lasting effects for all Americans,” the Business Roundtable, which represents major U.S. company chief executive officers, wrote in a letter to congressional leaders released yesterday.

Taking the government “to the precipice would foster uncertainty, dampen consumer and business confidence, risk higher borrowing costs, and could have immediate consequences for hiring and investment,” wrote Randall Stephenson, chairman of AT&T Inc. (T), and Louis R. Chenevert, chairman of United Technologies Corp. (UTX)

Stephenson is president of the Business Roundtable and Chenevert leads the group’s tax and fiscal policy panel.

Market Reaction

The Treasury Department suspended sales of its state and local government series of non-marketable securities yesterday. The securities, called “slugs,” are sold to states and municipalities so they can comply with U.S. tax laws and arbitrage rules when they have money to invest from their issuance of tax-exempt bonds.

After the extraordinary measures run out, the Treasury will be left with about $50 billion in cash, Lew said.

“That number, however, could be materially higher or lower, depending on the pace of tax refund filings,” Lew said. “In previous years, the Internal Revenue Service has issued as much as $10-15 billion in refunds on a single day and nearly $40 billion in a single week.”

Lew said government expenditures can be as high as $60 billion on certain days.

Insurance against five-year Treasury notes fell to 27.5 basis points yesterday, matching its lowest level of 2014. The value rises with the perceived risk of U.S. debt and falls if it’s deemed a safer investment. One basis point equals $1,000 annually on a contract protecting $10 million of Treasury debt.

Insuring Bonds

The cost of insuring the bonds spiked almost 110 percent in the month before hitting a one-year high of 45.5 basis points on Oct. 4, 2013, as investors grew worried about a U.S. default during the 16-day partial government shutdown.

Republicans haven’t been able to find enough votes for several plans floated in the past week as conditions for raising the debt limit.

Representative Mac Thornberry, vice chairman of the House Armed Services Committee, said Feb. 6 that the idea of restoring military benefits probably wouldn’t be included in a final measure because the change would increase debt.

Other options, since abandoned, included repealing an insurance provision of the Obamacare health-care law and mandating approval of the TransCanada Corp. Keystone XL pipeline.

‘No Reason’

“Once again, Republican inaction and delay is threatening the full faith and credit of the United States,” House Minority Leader Nancy Pelosi, a California Democrat, said in a statement yesterday responding to Lew’s letter. “There’s simply no reason to play political games with the debt ceiling.”

A debt-limit increase without conditions would need a significant number of Democratic votes.

“We’re still looking for the pieces to this puzzle,” Boehner said Feb. 6, joking that he’d have trouble finding enough Republican votes for a debt-ceiling increase even if sainthood for Mother Teresa were attached.

“We need Democratic support in order to pass it,” he said. “We’ve got broad support in our caucus, but I don’t think we have 218 votes.”

To contact the reporters on this story: Derek Wallbank in Washington atdwallbank@bloomberg.net; Kasia Klimasinska in Washington atkklimasinska@bloomberg.net

To contact the editor responsible for this story: Jodi Schneider at jschneider50@bloomberg.net

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