Say Anything Blog

Sprot Asset Management analysis (via Doug Ross) of America’s budget situation provides the sort of grim commentary Americans are growing increasingly familiar with.  Our nation’s deficits and debt are both spiraling out of control.  Traditional purchasers of our debt such as China, Japan, Russia and Brazil aren’t buying up our debt at a pace in line with the speed at which we’re creating it, and that’s putting some of our biggest entitlement programs in trouble.

Including Medicare, which is already in an operating deficit, and Social Security, which is looking less secure by the day.

‘Foreign and International Holders’... accounts for the largest source of external capital for US debt purchases and represents a very important group to float the deficit. ...Thus far, they have only purchased $465 billion to March 2009, which is halfway through US fiscal year - and well behind the pace needed to triple last year’s purchases… In fact, April Treasury data revealed that ‘Foreign and International Holders’ were net sellers of US debt from March to April 2009. This is not surprising given the public comments from officials in China, Japan, Russia and Brazil concerning the level of debt issuance by the United States and its potential impact on the US dollar.

...[In summary,] traditional buyers of US debt will be unable to increase their debt purchases this year, so we must question how the United States is going to cover this colossal shortfall… It may not surprise you to learn that the largest percentage owner of US debt is the United States Government itself. Perhaps this doesn’t make immediate sense to some readers, but it is a fact. The debt holdings are held in accounts for the various trust funds the US manages for its future obligations - the largest of which are set aside for Social Security and Medicare… Put simply, there are no real economic assets that can be drawn down in the future to fund benefits. Instead, they are claims on the Treasury, that, when redeemed, will have to be financed by raising taxes, increasing borrowing or reducing expenditures. For all intents and purposes, Social Security and Medicare receipts are essentially considered to be another source of government tax revenue that can be spent each year…

...Obviously this is a very troubling development for the US, and unfortunately it is likely to get worse. This year’s Social Security fund is only expected to balance, which is bad news for the government. Along with Social Security, Medicare is one of the trust funds that should be posting surpluses right now in anticipation of the massive future commitments the retiring Baby Boomers will require. As it stands, Medicare is in an operating deficit in 2009…

...We won’t speculate on what would happen to the Social Security program if new buyers for US debt disappeared, but we should all bear in mind that in that scenario the special-issue ‘IOU’s’ in the “Intragovernmental Holdings” account would be rendered worthless, and the US Government’s social ‘safety net’ would vanish.

The federal government is scrambling to convince its creditors to not only keep buying our debt at three times the rate they’ve bought it at before, but also that buying our debt is still a safe investment even as we plunge ourselves into ever-deeper holes of debt.  One solution they’re trying is increasing interest payments on our national debt, but that’s an expensive solution that is going to need revenue to fund it.  The only way we can get revenue is if a) our economy begins growing at a robust rate again (unlikely in the foreseeable future) or b) Congress and the President cut spending.

Since neither is likely to happen, there doesn’t appear to be any real solutions at this point.

And, if this isn’t all gloomy enough for you, remember that the current debt and deficit numbers we’re working from are based on the Obama administrations assumptions about future economic growth.  Given that those assumptions presume laughably-off base rates of economic growth that are usually seen only in the boomiest of boom times, our debt and deficits are both likely to grow at rates even faster than anyone is predicting now.

The icing on the cake?  Obama and his fellow liberals are still planning on an aggressive spending agenda, including government health care.

Meanwhile, Obama’s “stimulus” spending spree has the various states awash in cash for “weatherizing” homes that said states must now find takers for.