May 25, 2022

How Much Is A Trillion Dollars? – U.S. Debt Levels Exceed Comprehension

With little press coverage and no debate by Congress, the U.S. debt level is set to automatically increase by another $1.2 trillion in January.

The most remarkable aspect to the latest huge increase in U.S. debt is the manner in which the debt limit was implemented.   As part of last year’s budget agreement, even if Congress decided to vote against the debt increase, the President has the power to issue a veto.  In other words, the debt increase is a done deal – no debate, no discussion.

Massive deficit spending by the U.S. government was supposed to stimulate growth and bring us out of recession as it has in previous economic downturns.  This time, it’s simply not working and the debt levels have reached a tipping point at which economic growth slows as debt increases.

An impressive body of research covering eight centuries of government debt defaults (“This Time Is Different” by Carmen Reinhart and Kenneth Rogoff) resulted in ominously accurate predictions since its publication in 2009.  The collapse of the real estate bubble lead to a collapse of the banking industry which lead to massive government borrowings to bail failed banks and other institutions.

According to Reinhart and Rogoff, a slowdown in the economy leads to further government deficit spending which ultimately puts the solvency of sovereign governments into doubt, which is exactly what’s currently happening across Europe.

Meanwhile, as the U.S. approaches its own tipping point towards insolvency, Americans remain remarkably obliviously to the dangers of mortgaging our future.

How much is a trillion dollars of debt?  The number is so large that it is inconceivable for the average American to understand.  Deep down, the country has a foreboding of impending disaster from our crushing debt burden, but remains oblivious as to the real extent of the problem.

Here’s a visual to put things into perspective.

One Hundred Dollars $100 – Most counterfeited money denomination in the world.
Keeps the world moving.

One Billion Dollars $1,000,000,000 – You will need some help when robbing the bank.
Now we are getting serious!

One Trillion Dollars $1,000,000,000,000
When the U.S government speaks about a 1.7 trillion deficit – this is the volumes of cash the U.S. Government borrowed in 2010 to run itself.
Keep in mind it is double stacked pallets of $100 million dollars each, full of $100 dollar bills. You are going to need a lot of trucks to freight this around.

If you spent $1 million a day since Jesus was born, you would have not spent $1 trillion by now…but ~$700 billion- same amount the banks got during bailout.

15 Trillion Dollars – US GDP 2011 & Debt $15,064,816,000,000- The U.S. GDP in 2011. The debt as of Jan 1st, 2012 is 15,170,600,000,000. United States now owes more money than its yearly production (GDP).

Statue of Liberty seems rather worried as United States national debt soon to pass 20% of the entire world’s combined GDP (Gross Domestic Product).

114.5 Trillion Dollars $114,500,000,000,000. – US unfunded liabilities
To the right you can see the pillar of cold hard $100 bills that dwarfs the
WTC & Empire State Building – both at one point world’s tallest buildings.
If you look carefully you can see the Statue of Liberty.

The 114.5 Trillion dollar super-skyscraper is the amount of money the U.S. Government
knows it does not have to fully fund the Medicare, Medicare Prescription Drug Program,
Social Security, Military and civil servant pensions. It is the money USA knows it will not
have to pay all its bills.
If you live in USA this is also your personal credit card bill; you are responsible along with
everyone else to pay this back. The citizens of USA created the U.S. Government to serve
them, this is what the U.S. Government has done while serving The People.

The unfunded liability is calculated on current tax and funding inputs, and future demographic
shifts in US Population.

Note: On the above 114.5T image the size of the base of the money pile is half a trillion, not 1T as on 15T image.
The height is double. This was done to reflect the base of Empire State and WTC more closely.

Logical Minds Reject “Solution” Of More Debt

Logical minds are questioning the wisdom of US stimulus (deficit) spending.   We have already seen the end results of excessive borrowing and spending by the State of California – see California Defaults.

Global Worries Over U.S. Stimulus Spending

DAVOS, Switzerland — Even as Congress looks for ways to expand President Obama’s $819 billion stimulus package, the rest of the world is wondering how Washington will pay for it all.

“The U.S. needs to show some proof they have a plan to get out of the fiscal problem,” said Ernesto Zedillo, the former Mexican president who helped steer his country through a financial crisis in 1994. “We, as developing countries, need to know we won’t be crowded out of the capital markets, which is already happening.”

While the focus in Washington has been on putting together a stimulus package that will attract broader political support when it comes up for a vote in the Senate, here in Davos the talk has been about the coming avalanche of Treasury debt needed to pay for the plan on top of the bailout measures approved last fall, like the $700 billion Troubled Asset Relief Program, or TARP.

American officials maintain they are aware of the challenge. A top White House adviser, Valerie Jarrett, promised in Davos on Thursday that once the stimulus plan achieved its intended affect, the United States would “restore fiscal responsibility and return to a sustainable economic path.”

“Even before Obama walked through the White House door, there were plans for $1 trillion of new debt,” said Niall Ferguson, a Harvard historian who has studied borrowing and its impact on national power. He now estimates that some $2.2 trillion in new government debt will be issued this year, assuming the stimulus plan is approved.

“You either crowd out other borrowers or you print money,” Mr. Ferguson added. “There is no way you can have $2.2 trillion in borrowing without influencing interest rates or inflation in the long-term.”

“This is a crisis of excessive debt, which reached 355 percent of American gross domestic product,” he said. “It cannot be solved with more debt.”

While Mr. Ferguson is a skeptic of the Keynesian thinking behind President Obama’s plan — rather than borrowing and spending to stimulate the economy, he favors corporate tax cuts — even supporters of the plan like Mr. Zedillo and Stephen Roach of Morgan Stanley have called on the White House to quickly address how it will pay for the spending in the long-term.

The stimulus is widely expected to pass, but once it does, Mr. Roach said the focus would shift to “who foots the bill and what is the exit strategy. We don’t have the answer to either question.”

Mr. Zedillo, who remembers how Mexico was forced to tighten its belt when it received billions from Washington to keep its economy from collapsing in 1994, was even more blunt.

“People are not stupid,” Mr. Zedillo said. “They see the huge deficit, the huge spending, and wonder what comes next.”

US Should Take Its Own Advice

We could not come close to achieving fiscal responsibility when we did not have a financial crisis.  It is absurd to think that “at some future date” we will do so.  There is no easy solution to our financial nightmare.  The attempt to postpone and paper over the debt crisis with additional borrowed or printed money merely guarantees a bigger problem down the road.

Mr. Zedillo, former Mexican President, notes that his country was told by America  to “tighten its belt when facing financial collapse”.   Is the United States exempt from the same logic?  Why are we not taking the same advice we force upon others?

Inflation – The Real Long Term Threat To Financial Survival

Concerned with the preservation of wealth and purchasing power?

The US Government Will Not Choose Deflation
by Rich Toscano and John Simon

Conclusion

We in the United States have been dumping our dollars into the world for years and we continue to do so. We owe a staggering amount of foreign debt denominated in dollars and we are gearing up to borrow even more. Our legislators and the stewards of our currency are rabidly hostile to deflation — they are hostile, in other words, to the idea of the dollar gaining purchasing power. They have shown via word and deed that they will do whatever it takes to prevent deflation from taking hold. When deflation is viewed as even a remote possibility, there are effectively no limits to the amount of money the government can create nor to what they can do with that newly minted money.

Under these circumstances, we just don’t believe that the dollar is going to gain purchasing power in any sustainable way. The current deflationary storm could continue for a while yet, but the longer it goes on, the more violent and severe its reversal is likely to be.

Deflation is a choice within the current monetary regime. It is a choice that our government has shown it will not make. There are serious long-term risks inherent in our dysfunctional monetary system, to be sure — but deflation isn’t one of them.

The writers construct an excellent case in explaining why the government must and will chose inflation.   A must read.

FOREX Traders Call Bernanke’s Hand

Currency traders have voted on the Fed’s latest policy decisions and this is the result – a collapsing dollar.

Courtesy of stockcharts.com

The magnitude of the latest rate cut apparently surprised foreign dollar holders who can only assume that the US economy is weaker than they previously believed.  Why would a foreign investor hold dollars that return zero interest and also risk foreign currency losses on top of that?

The Fed’s intention to create as many dollars as necessary to cure the credit markets is creating a huge oversupply of dollars.  Is the falling dollar the result of unintended consequences or was it a deliberate calculation by the Fed to weaken the dollar?  A weak dollar means US companies can sell their goods at cheaper prices, thus boosting sales and profits.   A weak dollar would also boost the price of foreign imports and in theory help prevent further deflation.  If the Fed was planning on a weak dollar policy, it was a poor choice on either count.  Consumers can’t afford higher prices and other nations can also cut rates to zero.

Previous actions of the Treasury and the Federal Reserve have not inspired confidence.  They are trying everything that might work with no certainty of the end result.    An almost proactive policy to weaken the dollar may only invite competitive devaluations, creating further havoc in the currency markets.

The factor that may now cause the most fear is that  interest rate cuts are no longer a policy option.  The unintended consequences of applying unconventional monetary policy, the only option left, may now be the biggest fear of all.

Is Burying Your Cash The Answer?

Fear and loss of confidence in our economic future due to over leverage can be seen in many areas.  There have been many stories lately about individuals attempting to secure their future by burying cash in their backyards.  Those of presumably greater means with the same idea have propelled safe manufacturers into one of the few industries showing sales growth today.

Burying cash is an old idea born of the depression years prior to the FDIC when if a bank went under you lost your money.   Under the current Federal guarantee of bank deposits, the failure of a depositor to be made whole would be equivalent to a default by the Federal Treasury.

Those inclined to burying cash should ponder the baseball card craze of years past.   Baseball card “investors” would fill their garages and basements with boxes of unopened cards and dream of the day when their value would skyrocket.  The card sellers made money but the buyers failed to realize that the cards they were buying as collectibles were being produced in massive quantities, almost guaranteeing little scarcity value in the future.  Paper cards could also be flawlessly produced in quantity by counterfeit card operators.  While individually graded cards merited an investment consideration, holding boxful’s of ordinary cards did not seem wise.

The cash dollars of today are the baseball cards of yesterday.   Dollars can be produced cheaply and in infinite quantities as deemed necessary by the Federal Reserve.  There is a risk of buried cash being lost or stolen.  There is no risk betting that the Government will print as many dollars as necessary should the downward economic spiral continue.  As the Government assumes the massive losses of every more entities via bailouts, those still holding the cards may become the winners (from a value standpoint) over those holding dollars.

My viewpoint is that one asset class deemed worthy of investing in to preserve wealth is gold, as discussed in Gold, Cheap at $5,000?

Gold investors have been laughed at for years and there have been long periods of declines and/or under performance in price versus other asset classes.  Gold, however, is the only monetary asset where the ultimate value of your investment is not subject to someone’s else’s promise or ability to pay.  I view gold as the ultimate insurance hedge against a government’s propensity to spend itself into insolvency and, accordingly, I believe that gold should constitute 10 to 20% of one’s core investment assets.   Historically, governments  have regularly and repeatedly defaulted on their sovereign debts.  In every such case of default, the citizens of those nations would have been far better off holding gold rather than government paper.