Why Trillion-Dollar Annual Deficits May Only Go Away Temporarily

Why Trillion Dollar Annual Deficits May Only Go Away Temporarily image Annual DeficitsWhy Trillion Dollar Annual Deficits May Only Go Away TemporarilyPoliticians and the mainstream will certainly love this…

Last week, Moody’s Investors Service changed its outlook on the U.S. national debt from negative to stable. (Source: Reuters, July 18, 2013.)

Despite the credit reporting agency’s “upgrade” on U.S. national debt, my opinion remains the same: the U.S. national debt has taken on a life of its own, growing like a bad cancer with no cure in sight.

Consider this:

In June of this year, the U.S. government registered a surplus of $117 billion after a budget deficit of $139 billion in May. On the surface that sounds great. But look a little closer, and we see that interest paid on the U.S. national debt for the month of June was $93.03 billion.

In the fiscal year so far (October 2012 to June 2013), the U.S. government has paid $345.26 billion as interest. For the full fiscal year (ending October 31, 2013), interest rate expense on the U.S. national debt is expected to reach $420.61 billion. (Source: Department of the Treasury, Financial Management Service, July 11, 2013.)

That’s almost half a trillion per year on interest payments only! And we must remember the Federal Reserve is keeping interest rates artificially low. If interest rates doubled (which is not a long-shot concept, considering that even if rates did double from here, they would still be below the 30-year average), the government interest rate payments could read $1.0 trillion a year!

Looking at the U.S. national debt as a percentage of our gross domestic product (GDP), it stood at 105.07% at the end of the first quarter of this year. (Source: Federal Reserve Bank of St. Louis web site, last accessed July 19, 2013.)

Comparatively, in the first quarter of 2012, the U.S. national debt-to-GDP ratio was 100.8%. But I thought the Obama Administration said it would cut back on our debt?

Looking back further, in the early 1980s, the ratio of U.S. national debt to GDP stood just above 30%. With the national debt close to reaching $17.0 trillion, looking at the nominal value, the U.S. is the most indebted nation in the global economy.

But this is just one piece of the puzzle. Failing cities, due to staggering budget deficits and troubled states, can cause U.S. national debt to increase even more. We heard Friday morning that Detroit filed for bankruptcy, leaving more than 100,000 creditors astray. (Source: Detroit Free Press, July 18, 2013.) The federal government bailed out General Motors Company (NYSE/GM); will it bail out “Motor City”?

Dear reader, U.S. national debt has skyrocketed—that’s not a hidden fact anymore. And this is a major concern for the sovereignty of this nation. Our credit rating is still top-notch, but I beg to ask the question: how long can it last?

When the government incurs a budget deficit, it must come up with money to pay for its expenses. The government can pay its bills by either increasing the national debt (selling bonds bought by a Federal Reserve that just prints money and gives it to the government) or by raising taxes. But raising taxes is not popular with politicians because such an action would threaten their chances of getting re-elected.

Higher interest rates are on their way. The yield on the 10-year U.S. Treasury has risen from 1.50% one year ago to 2.47% today. Getting away from annual trillion-dollar deficits will be difficult for the government, as what it saves on budget cuts will be compromised by higher interest payments and possible bailouts for cities and states.

(I encourage my readers to keep an eye on the “debt clock” we maintain on our sister web site, www.investmentcontrarians.com.)

Michael’s Personal Notes:

Wherever we turn to in the media today, we hear or read the U.S. economy is witnessing a period of economic growth. The media and politicians cite an improving luxury car market, rising real estate prices, and jobs growth.

On the contrary, and as I have been writing in these pages for months (if not years), economic growth in the U.S. economy can only occur when consumers are optimistic and feel better about spending; the opposite of that is happening right now.

According to the U.S. Department of Commerce, sales at restaurants and bars in the U.S. economy plummeted the most in June since February of 2008. Sales at restaurants and bars also witnessed a decline in May. (Source: Wall Street Journal, July 15, 2013.)

In times of economic growth, consumers go out and spend money. As purchases at restaurants and bars are discretionary, this tells me consumers in the U.S. either don’t really want to spend or don’t have much to spend.

U.S. companies are also painting a picture of slowing consumer spending. Consider General Electric Company (NYSE/GE), one of the pioneer companies in the U.S. economy. General Electric (GE) reported second-quarter earnings that beat estimates, but the company’s revenues declined two percent from the same period a year ago. (Source: General Electric Company web site, July 19, 2013.) In times of economic growth, you want to see earnings increasing with revenues.

Why aren’t the consumers in the U.S. economy spending?

Wages of employees in the U.S. economy in real terms, adjusted for inflation, are declining. In June, real average weekly earnings for all employees in the U.S. declined 0.1% from May. (Source: Bureau of Labor Statistics, July 16, 2013.)

The jobs market in the U.S. economy is still weak. The “official” figures do not include people who have given up looking for work and those who want full-time work but can only get part-time work. And the majority of job creation since the credit crisis hit has been in the low-wage-paying sectors.

Troubles for the average joe just don’t end here. Right now, we are seeing rising oil prices—and this will put more pressure on consumer spending in the U.S.

So what’s the truth of the matter? There is no real economic growth in the U.S. economy.

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