National Debt

The official U.S. national debt has just surpassed $13 trillion. This does not include the debts of Fannie Mae and Freddie Mac, which are now backed by the Federal Government. Once you include Fannie/Freddie’s debts of $6.3 trillion, our real national debt is now $19.3 trillion. The U.S. also has $60 trillion in unfunded liabilities for Social Security, Medicare and Medicaid, which bring our total obligations to $79.3 trillion or about 5 1/2 times our gross domestic product (GDP) of $14.6 trillion. With consumer spending now making up 71% of our GDP (compared to the long-term average of 65%), it is impossible for the U.S. to ever pay its national debt and unfunded liabilities through taxation.

Total U.S. tax receipts in 2009 were only $2.105 trillion, less than the $2.112 trillion Americans received from the government last year in the form of transfer payments for Social Security, unemployment compensation, welfare, and other entitlement programs. The U.S. government had a budget deficit in fiscal year 2009 of $1.4 trillion, which is projected to reach $1.6 trillion in fiscal year 2010. Congress recently raised our national debt ceiling to $14.3 trillion, which we will easily hit in less than one year.

It took 25 years for our official national debt to double from $257 billion in 1950 to $533 billion in 1975. On September 30th, 2003, the U.S. ended fiscal year 2003 with a national debt of $6.78 trillion. This means that a few months from now, the latest doubling of our national debt will have occurred in just 7 years! Our official national debt is now growing more than 3 1/2 times faster than decades ago.

In April of 2010, the U.S. paid $22.48 billion in interest payments on our national debt for an interest rate on our marketable debt of only 2.498%. Just three years earlier in April of 2007, our total marketable debt interest rate was 4.963% (almost double). We will inevitably see our marketable debt interest rate rise back up to 5%, which will cause our annual interest payments on our national debt to rise above $500 billion or 23% of projected 2010 tax receipts of $2.165 trillion.

Inflation

Today, the average American’s net worth (adjusted for real inflation) is down to year 1970 levels. In terms of income, average hourly earnings in the U.S. is now at a record nominal high of $18.99; but adjusted for real inflation, hourly earnings is now about half of what it was in the early 1970s. Americans have experienced a dramatic decline in their standard of living since 1970.

The Federal Reserve has expanded its monetary base from $873.8 billion in September of 2008 to its current level of $2.036 trillion. U.S. financial institutions now have over $1.045 trillion in excess reserves, compared to only $59.5 billion in excess in September of 2008. Banks currently have their excess reserves parked at the Fed where they are earning interest. Based on the Bureau of Labor Statistics’ (BLS) latest CPI report, the current year-over-year U.S. price inflation rate is 2.02%.

Taking into account how the Consumer Price Index (CPI) understates inflation, we believe the real rate of U.S. price inflation is currently 5.02% to 6.02%. We doubt that banks will want to keep their $1.045 trillion in excess reserves parked at the Fed for much longer earning 0.25% interest, when based on the real rate of inflation, those dollars are losing about 5% of their purchasing power on an annualized basis by sitting there.

Eventually, these banks will be forced to seek a higher return than what the Fed is paying them. As these dollars get lent out and enter the money supply, they will multiply through our fractional reserve banking system, creating a huge surge of price inflation.

Entitlements

Americans are more dependent on the government than ever and will continue to rely more heavily on government entitlements. There are now 40.2 million Americans on food stamps up 21% from one year ago. That is more than 1/8 of the U.S. population. Food stamp usage has increased for 16 consecutive months and 43% of Americans on food stamps have a job. The White House estimates that food stamp usage will increase in fiscal year 2011 to an average of 43.3 million people.

Americans are now only receiving 41.9% of their income from private wages, down from 44.6% in December of 2006 and 47.6% in the first quarter of 2000. Americans are receiving 17.9% of their income from government programs, up from 14.2% in December of 2007 and 12.1% in the first quarter of 2000.

Unemployment

Inflation does not create jobs. Although the official U.S. unemployment rate is now 9.7%, including short-term discouraged workers who gave up looking for a job, the real unemployment rate is 16.9%. If you also include long-term discouraged workers who haven’t looked for a job in over one year, 21.7% of Americans are now unemployed.

Employment

The Federal Government is now the single largest employer in the U.S. The average federal worker is now earning $119,982 per year with benefits, compared to average annual earnings of only $59,909 per year with benefits in the private sector. While incomes in the private sector are contracting, federal workers are receiving a 2% pay raise in 2010, after receiving a 3.9% pay raise in 2009.

Growth in government is a drain on the private sector. While the U.S. Treasury sold $78 billion in new government debt in May, companies sold only $66.1 billion in corporate debt, the least since December of 2000. The extra yield investors demand to own corporate bonds over government bonds increased by 44 basis points in May to 193 basis points, its largest increase since November of 2008.

The Value of the Dollar

The U.S. dollar index only compares the value of the U.S. dollar to other fiat currencies and is heavily weighted against the euro. The best way to determine the purchasing power of the U.S. dollar is the price of gold. Despite the huge rally this year in the U.S. dollar index, the price of gold rose to a new all time nominal high on June 8th of $1,252.10 per ounce.
The U.S. dollar index has rallied in 2010 only due to the declining euro, which has been fueled by the debt crisis in Greece. Greece had a budget deficit in fiscal year 2009 that reached 13.6% of its GDP. As a member of the eurozone, Greece’s budget deficit wasn’t supposed to exceed 3% of GDP.

Source: The National Inflation Association 2010 Inflation Report, June 2010

Full text of the report here

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• BTL Update 2011 December 4
• Facts and Truth About U.S. Inflation, Debt, and Political Crisis
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• BTL Update 2011 July 30
• Bernanke is Wrong, Gold is Money
• Media Already Marginalizing Ron Paul Presidential Campaign
• BTL Update 2011 March 3
• Reality Zone Unfiltered News 2011 January 22-28

Tags: bls, cpi, debt, federal reserve, inflation, national debt, unemployment

This entry was posted on Tuesday, June 22nd, 2010 at 2:26 pm and is filed under Banking and Monetary Policy. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.