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US: Debts and Back Up

16-trillion-debt-

The published piece called America’s Debt: Upper Tip and the Bulk of the Iceberg offers a wide range of assessments to determine the size of US debt. Today the country has to raise the debt ceiling again, otherwise the United States will lapse into a coma. But are there any limits to raising the ceiling? What is used as the debt backup? Is America able to serve the debt? 

US GDP bluff

Usually the burden is measured by the correlation between debt and annual gross domestic product (GDP). According to official US Treasury Department data, the debt is around 106% of GDP at the moment. In other words even if America shows no signs of life whatsoever (no eating, drinking, building, driving, heating, producing arms and waging wars in different parts of the world…), it won’t be able to pay off its debt in a year. 

Unlike in many other countries, the US GDP structure envisions total consumption of whatever is produced by national economy. Only the countries which consume less than they produce can save enough to pay off the debts. Many states which represent the periphery of world capitalism have the debts making up 20-30% of GDP. They cover the debt obligations at the expense of remaining share of GDP (paying off interest rates and the main part of the debt). In the case of America the share is a zero or a sum with minus, and it has been like this since a long time. It means the United States consumes more than it produces, that is the United States lives in debt at the expense of other countries. Its national gross domestic product is not enough to be a backup for the debt. 

Even if America could save 20 or 30% of GDP and use the rest for payments, it could hardly find a way out of the debt maze. 

First, the national debt is just the upper tip of iceberg or the whole comprehensive debt of the country. With the debts of all sectors of economy (households, states and municipalities, financial and non-financial sectors) counted, including the «out of balance» financial and welfare liabilities, the total size of the United States debt is at least 1000% of GDP. 

Second, a great part of GDP is a bubble, it’s zilch. The real economy sector is only a bit over one fifth of GDP. The rest falls on services, intermediaries of all kinds and advisers. America politicians call it a «postindustrial society». Actually it’s outright cheating. The US offices responsible for statistics let the financial swindlers call the shots and blow the statistics bubbles on stock and real estate exchanges, as well as other markets. The lenders, who mean serious business, know well how to distinguish «bubbles» from «real balance», so they demand payments by what has real value, no bubbles.

Actually this kind of soap suds - bubbles exist in the economic statistics of many countries (thanks to intensive efforts of International Monetary Fund experts which help to «perfect» national systems of accounting). But real savvies say the United States statistics leave others far behind from point of view of GDP falsification. It would be expedient to add, that if the gross domestic products of the United States and China are compared not by nominal indexes, but rather using real values (goods and services of real economy), then it would be made clear that the Celestial Empire has been leading since a long time. 

«US economy assets» as a backup

Serious creditors give priority to the availability of backup, not the ability of a recipient to generate some financial flows to pay off the debt liabilities. It could be a banking guarantee. But in the most cases, it is property or mortgage. America fully spends its GDP on everyday needs. Perhaps it has valuable assets to pay the debt off? The total value of what the economy has produced in many years plus natural resources, which are the gift of God, all of it together is called national wealth. There are no statistics on what the US national wealth is worth, only the estimates of experts.

About ten years ago the specialists of Russian Academy of Sciences’ economic division made calculations (based on the methods used by the World Bank) to assess the US national wealth (year 2000). Along with natural resources it was estimated to be equal to $24 trillion. In the case of Russia it was 2, 5 times as much (predominantly at the expense of natural resources). Obviously, estimated in the current year prices, the index should be raised due to the devaluation of US dollar by approximately four times. It’ll be around $100 trillion, enough to redeem the so called «incurred» debts. It would not be enough to redeem all the debts, including social spending on medicine and pensions (the consolidated debt). 

There are estimates of some separate elements of US national wealth (assets) found in the works of American economists. For instance, last year a group of US congressmen ordered the research called The United States as a Net Debtor Nation: Overview of the International Investment Position (James K. Jackson, Specialist in International Trade and Finance. November 8, 2012, Congressional Research Service // 7-5700). The report adduces the following data on US assets in trillions of dollars (2011):

Fixed private capital – 35, 2

Fixed government capital – 11, 2 

Financial assets – 44, 8 

Total– 95, 4 

About a half of assets (47%) are bubbles. Fixed assets (the main capital) are 46, 4. These are the most conservative estimates of US «contact» debts. There are no assets to cover social welfare costs. 

The US National Debt Clock shows the US total assets are equal to $104, 9 as of this October. There are some elements included into the index ($ trillions): small business – 8, 5, corporations – 20, 1, households – 76, 3. It’s clear the bubbles account for «financial bubbles», but the Clock does not distinguish between real and financial assets. In the last article we set the example of estimates produced by Professor Laurence Kotlikoff, who states that the US consolidated debt exceeded $220 trillion as of 2011. If the Clock is right the US economy assets (including financial assets) are not enough to cover even a half of consolidated debt. 

Can US shoulder the debt?

Debt service is the cash that is required for a particular time period to cover the repayment of interest and principal on a debt. Not only common Americans but many politicians have a vague idea if the country is capable of debt service. It’s not the most complicated issue, so let’s try to make head or tail of it: how much does America spend to pay off official national debt? The money is spent from the US state budget. The fiscal year ended on September 30. The United States spent $220 billion to pay off interest rates. The federal budget was $3, 5 trillion, the interest rates payments made up for 6, 2%. Actually it’s a rather modest figure; there were worse times in America’s history. In 1929/1930 fiscal year the index was 21, 2%.

The Great Depression stepped in and the government was trying hard to abruptly increase budget expenditure in order to save the economy. The forever growing state expenditure raised interest rates to unprecedented high. In 1947/48 fiscal year the relative expenditure on interest rates was 15, 7%. It was a result of intense state borrowing in the days of WWII. Now let’s have a look at what it has been like in the recent years. The interest rates expenditure was $454 billion or 12, 6% of federal budget. It’s serious enough. To compare: the same fiscal year the military allocations were at relative level of 18, 8%. That is the interest rates expenditure was equal to 2/3 of military spending. 

In the period from 2010/2011 to 2012/13 fiscal years the United States national debt grew adding a few trillion dollars while the interest rates payments went down two and a half times. It’s all simple. The government interest rates on government loans went down because the Federal Reserve System ran the printing press calling it «quantitative easing». If money supply grows then currency value is doomed to fall. There are different explanations to the question what America needs «quantitative easing» for. I think first of all it wants to provide the government with cheap or outright worthless money (the Federal Reserve interest rate has been at the level of 0, 25% for a long time). But the «quantitative easing» addiction cannot last forever.

That’s what Ben Bernanke, the head of Federal Reserve System, has said of many times. When the «quantitative easing» is over, the interest rates will rise to greatly spur the expenditure. Serious experts believe that under normal (not distorted by «quantitative easing») conditions the US government interest rate payments will increase up to 1 trillion dollars in the early 2020s. The Congressional Budget Office predicts that in 2021 the interest rates expenditure will exceed the military spending. The authors of such forecasts say the calculations are hypothetical. The possibility of the United States making it to the early 2020s as one state is far from being 100% guaranteed. The possibility of default is high, it’s impossible to predict the social, economic and political consequences. 

The total interest rates expenditure goes beyond the US national debt limits, states municipalities, banks, corporations, and households have debts of their own. The last years the experts have tried many times to estimate the total US debt service expenditure. The recent figure is $2, 8 trillion. It’s is relatively equal to 17, 5% of US GDP. It means to prevent further plunging into the quagmire of debt abyss; the US should have a 17, 5% economic growth. America has not made headway since 2007 as the financial crisis set in. It has zero growth at best. One does not need to be a soothsayer to come to the conclusion: Americas is in for default and not on national debt only, but on all kinds of debts it has accumulated so far…