This year September 25, is the day that the government starts living off its credit card. Today the U.S. Federal government spent the last of its $2.7 trillion in 2013 revenue and will be borrowing for the rest of the year. The debt ceiling, the limit of the total debt, is about to be reached. At this point the total U.S. debt will total $16.4 trillion, 607% of this year’s tax revenue.

To put this in a little bit of perspective, imagine the government is a household pulling in $50,000 annually. This year’s spending would equal $67,500. The house would be overspending $17,500 each year, an extra 35% over a balanced budget. The total household debt would equal $303,704. The good news is that since last year the government got a proverbial 10% raise, from higher tax revenues. Unfortunately, this was partly offset by a 3% increase in spending. Anyone telling you that the “sequester” was a major belt tightening obviously doesn’t know how a family budget works.

Thankfully, sovereign debt doesn’t operate in the same way as a household income. First of all, the U.S. government is sitting on a massive set of assets. Oil and gas resources on and offshore alone are worth $128 trillion. We have 261,498,926.247 oz. of gold (about $442 billion). The U.S. has no intention of actually selling most of these assets, but they do increase our proverbial credit. The government has chosen to leverage these assets to pay for the massive spending apparatus that is the Federal government.

It is important to note that the government still has to pay interest on this debt. In 2012, it cost the government $359 billion dollars in interest, 13% of this year’s tax revenue. This is with rock bottom interest rates. Over the past several years, the Federal Reserve has been buying up U.S. Treasury bonds like candy. Right now they are buying $85 billion every month. Having a buyer with the ability to print money out of thin air has been pushing down the interest rates so far, but they are about to rise.

So now we get back to the debt ceiling. The reason it exists is so that the Federal Reserve can’t simply print money to service unlimited U.S. debt. This would result in massive inflation that would completely destroy savings and wealth in the country. The U.S. is stuck between a rock and a hard place. If it doesn’t raise the debt ceiling, it would either have to stop providing any and all services (inconceivable) or it would default on its debt. Defaulting on debt would substantially raise interest rates paid on the debt, because the bond holders would fear they would not be repaid on time or at all. At the same time, writing a blank check to raise the debt ceiling would also raise interest rates as bond holders would believe the government intends to inflate its way out of the debt, reducing the worth of the bonds they are holding.

The surest way to keep your lenders happy is to show a strong financial position. Unfortunately, the U.S. Federal government is not in this position. A CBO report that was just released estimates that U.S. debt will reach 100% of GDP by 2038. It is currently at 73%, the highest in U.S. history except for a brief period around WWII. Right now, problems in the rest of the world is keeping money in U.S. Treasury bonds. Unless the U.S. substantially changes its debt trajectory, however, its days as the world reserve currency are numbered. At this point, interest rates will skyrocket.

 

Podcast – Deficit Day – The Adam Goldfein Show – Hour 1

Podcast – Deficit Day – The Adam Goldfein Show – Hour 2

 

 

Additional Resources

The Wall Street Journal, Happy Deficit Day, Uncle Sam: http://online.wsj.com/article/SB10001424127887323808204579089003430645252.html?mod=WSJ_Opinion_LEFTTopOpinion

The Wall Street Journal, Cruz’s Defiant Stand Is Also a Lonely One: http://online.wsj.com/article/SB10001424052702304213904579095632738384164.html?mod=WSJ_hps_LEFTTopStories

The Guardian, Republican Ted Cruz Blames Democrats for Looming Government Shutdown: http://www.theguardian.com/world/2013/sep/23/ted-cruz-blames-democrats-government-shutdown

Time, The Federal Government’s $128 Trillion Stockpile: http://business.time.com/2013/02/05/the-federal-governments-128-trillion-stockpile-the-answer-to-our-debt-problems/

Reuters, House Could Vote as Soon as Friday on Debt Limit Bill: http://www.reuters.com/article/2013/09/25/us-usa-fiscal-debt-idUSBRE98O0LU20130925

Bloomberg, Obama Says He Won’t Negotiate on Raising Debt Ceiling: http://www.bloomberg.com/news/2013-09-22/obama-says-he-won-t-negotiate-on-raising-debt-ceiling.html

Reuters, Debt Limit Row, Government Shutdown Unlikely to Hit U.S. Rating: Moody’s: http://www.reuters.com/article/2013/09/24/us-usa-debt-moodys-idUSBRE98N0KW20130924

Bloomberg, Treasury 10-Year Yields Touch 6-Week Low Amid U.S. Budget Talks: http://www.bloomberg.com/news/2013-09-25/treasuries-rise-fourth-day-as-debt-limit-talks-boost-safety-bid.html

Council on Foreign Relations, How Dangerous Is U.S. Government Debt? http://www.cfr.org/financial-crises/dangerous-us-government-debt/p22408

U.S. Debt Ceiling: Costs and Consequences: http://www.cfr.org/budget-debt-and-deficits/us-debt-ceiling-costs-consequences/p24751

Grunden, Deficits, Debt, and Markets: http://www.grunden.com/deficits-debt-and-markets.html

Y Charts, U.S. Currency in Circulation Chart: http://ycharts.com/indicators/us_currency_in_circulation