11/24/09 The Growing Interest Debacle

Precious Metals Market Analysis, By Michael Pennington (Copyright 2010 Pennco Coins)

The premise is that, although we’re fine now, borrowing money cheaply, we’ve got a huge re-financing coming up, and there’s an excellent chance it will be way more expensive.
With the national debt now topping $12 trillion, the White House estimates that the government’s tab for servicing the debt will exceed $700 billion a year in 2019, up from $202 billion this year, even if annual budget deficits shrink drastically. Other forecasters say the figure could be much higher.

In concrete terms, an additional $500 billion a year in interest expense would total more than the combined federal budgets this year for education, energy, homeland security and the wars in Iraq and Afghanistan. A really astounding fact is that due to super-low interest rates, our annual debt-service requirements are lower this year than they were last.

It’s one of those numbers that’s so unbelievable you have to actually think about it for a while… Within the next 12 months, the U.S. Treasury will have to refinance $2 trillion in short-term debt. And that’s not counting any additional deficit spending, which is estimated to be around $1.5 trillion. Put the two numbers together. Then ask yourself, how in the world can the Treasury borrow $3.5 trillion in only one year? That’s an amount equal to nearly 30% of our entire GDP. And we’re the world’s biggest economy. Where will the money come from?The U.S. is bankrupt right now. It is so bad there is no way out. When governments go bankrupt it’s called “a default.”  The criteria of bankruptcy is that if you can’t pay off all of your foreign debts in the next 12 months, you’re a terrible credit risk. Speculators are going to target your bonds and your currency, making it impossible to refinance your debts. A default is assured.

So how does America rank on the potential bankrupt scale? It’s a guaranteed default. The U.S. holds gold, oil, and foreign currency in reserve. The U.S. has around $300 billion in gold. The U.S. strategic petroleum reserve is worth roughly $58 billion worth of oil. And according to the IMF, the U.S. has $136 billion in foreign currency reserves. So altogether… that’s around $500 billion of reserves. Our short-term foreign debts are far bigger.

According to the U.S. Treasury, $2 trillion worth of debt will mature in the next 12 months. So looking only at short-term debt, we know the Treasury will have to finance at least $2 trillion worth of maturing debt in the next 12 months. That might not cause a crisis if we were still funding our national debt internally. But since 1985, we’ve been a net debtor to the world. Today, foreigners own 44% of all our debts, which means we owe foreign creditors at least $880 billion in the next 12 months – an amount far larger than our reserves.

Keep in mind, this only covers our existing debts. The Office of Management and Budget is predicting a $1.5 trillion budget deficit over the next year. That puts our total funding requirements on the order of $3.5 trillion over the next 12 months.

So… where will the money come from? Total domestic savings in the U.S. are only around $600 billion annually. Even if we all put every penny of our savings into U.S. Treasury debt, we’re still going to come up nearly $3 trillion short. So where will the money come from? The printing press. The Federal Reserve has already monetized nearly $2 trillion worth of Treasury debt and mortgage debt. This weakens the value of the dollar and devalues our existing Treasury bonds. Sooner or later, our creditors will face a stark choice: Hold our bonds and continue to see the value diminish slowly, or try to escape to gold and see the value of their U.S. bonds plummet. I believe they will go for the Gold. Right now we are seeing China, India, Russia and other nations selling their dollars in order to buy Gold. This is only the beginning of a trend that will grow in the future.

In the U.S. the “solutions” being proposed almost entirely focus on more government, more regulation, more spending, and more taxes. In other words, pretty much the exact opposite of what the economy now needs.

The debt levels of this country are still at record levels, but yet the government’s grand scheme is to ratchet those debt levels even higher. It is doing so by offering cheap money, incentives to take mortgages that people can’t afford, and by running trillion-dollar-plus deficits of its own.

So we have a morally, philosophically, and financially bankrupt government, encouraging a  financially bankrupt public to place even more faith in the ability of said government to lead the nation on to greener pastures.And to do so largely by borrowing trillions of dollars to dump back into failing institutions and make-work projects, and by levying yet more taxes on businesses and high-income earners – who, it should be noted, are already paying a record percentage of total federal tax receipts (the top 5% now pay over 60% of all taxes).People have lost all sense of perspective, or what made this nation the economic power it once was.


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