China passes Japan as largest creditor for US National Debt

November 20th 2008.

China has bought more of the US National Debt and has now surpassed Japan as the largest creditor. China's investment in U.S. Treasury bonds surged to $585 billion in September 2008, surging past Japan's $573.2 billion worth.

The debt purchase by China raises the US dollar while devaluing the Yuan, hurts American manufacturers and creates the potential for US banks to raise interest rates in the future.

See: China buys more US debt, passes Japan for more details.

US National Debt Clock Runs Out of Digits

October 9th 2008

UNITED STATES - The clock has run out on the national debt.

The national debt clock, the unofficial tracker of the federal budget deficit maintained by the Durst Organization in New York, has reached its limits. Last month, as the national debt exceeded $10 trillion for the first time, the clock ran out of digits to record the number.

The dollar sign in the clock had to be deleted and replaced with a one to record the massive number. The clock’s owners say a new model — with space for two extra digits — will be in place early next year.

Now the debt clock will be able to reach the quadrillions. Hopefully, that’s not a level that will be breached any time soon.

National Debt Passes $10 Trillion, Few Notice

October 7th 2008

UNITED STATES - There are enough signs of the apocalypse already: the global financial crisis, reports that one in four mammals are at risk of extinction, the Cubs (briefly) making the playoffs. So maybe it's no surprise that a huge milestone (or tombstone perhaps) slipped by without much notice. The national debt broke $10 trillion on Sept. 30, but honestly there was so much going on that we can forgive everyone for being distracted. Including us.

Ten trillion is an almost unimaginable number -- so colossal that the even the people who worry about debt had trouble anticipating it. The National Debt Clock in Times Square, for example, didn't even have room for that many digits. On Sept. 30, they had to squeeze the "1" and the dollar sign into the same box.

How much is a trillion dollars anyway? Like we all learned in school, it's a thousand billions, and as the old line goes, "a billion here and a billion there and pretty soon you're talking about real money." But the difference between a billion and a trillion is staggering.

With a billion dollars, you could keep about 45,000 people in a four-year college for a year -- or, depending on their behavior, in jail. The College Board says private tuition and fees average $22,218 per year; the Bureau of Justice Statistics says the average cost per inmate is $22,650 per year. With a trillion dollars, you could cover tuition for 45 million people -- and in 2006 there were only 17 million students enrolled in college nationwide.

You could think of lots of good ways to spend $10 trillion, but the point is that we don't have it -- we owe it. And hold on, folks, there's more. Just to name a few:

This problem is getting worse. We're adding to the debt at mind-boggling rates. In fact we're spending more on interest on the national debt than we're spending on the Iraq war. For 2008, the budget deficit was projected to be more than $400 billion - but that was before the Wall Street bailout. Not only did the Congressional Budget Office project a $400 billion deficit this year, they also anticipated a $400 billion deficit, next year, and the year after that, with further deficits for the next decade. The numbers could be much worse than that. The financial crisis and the recession that will almost certainly follow will reduce tax revenues because people who are unemployed and businesses that are losing money don't pay taxes. So those figures are optimistic.

We're borrowing to pay for the Wall Street bailout. True, as many have pointed out, the government may actually make money on the bailout in the long run. The bad debts the government buys should be worth something at some point, so the final bill may well be less than $700 billion. But that may be years off -- the money we have to shell out up front will be paid over the next two years. At no point during the ragged, torturous congressional debate did we really talk about how the government's going to pay for this. No one's talking about tax increases or spending cuts to cover it. And when politicians don't specify how they're going to pay for something, that means they're going to borrow. And, by the way, those little "sweeteners" -- the Congressional earmarks for children's wooden arrows, racetracks and the rums of Puerto Rico -- are paid for with red ink too.

The irony of the government borrowing to head off the consequences of bad debts speaks for itself. The good news is that the U.S. government is one of the few institutions out there that can borrow. Banks won't loan to each other, much less businesses and consumers, but the U.S. Treasury bond is one of the few safe havens left. And many would argue that this is not the time to quibble - when you're trying to put out a fire, you don't worry about where the water is coming from. But after the fire is put out, the debts are going to remain.

We've got more big bills on the way, and no plan to pay them. The Government Accountability Office estimates that rising health care costs and the retirement of the baby boomers mean a cool $53 trillion in "unfunded liabilities" ahead of us over the next several decades . By 2040, if nothing changes, the government won't have any money for anything other than Medicare, Medicaid, Social Security and paying interest on the money we've already borrowed.

You know, of course, how the bank insists that you have a specific schedule to pay back your car loan or mortgage? (Never mind that this isn't working out for lots of people right now). Well, the government doesn't have one. The plan for paying off the national debt can be summed up as "maybe someday we'll have a surplus again, and we can pay it down." As for that $53 trillion in liabilities, that depends entirely on whether we as a nation can come up with a politically viable plan to fix Social Security and Medicare. You know how well that's gone in the past.

Neither Barack Obama nor John McCain is talking about this problem. In fact what they're saying right now will make the problem worse. If you saw the first presidential debate, you saw Jim Lehrer try to pin these guys down on how the Wall Street bailout would affect their plans. You also saw them both duck the questions. The nonpartisan Tax Policy Center says McCain's plans would increase the national debt by $5 trillion over the next 10 years, while Obama's would increase the debt by $3.5 trillion. Right now one of the biggest unspoken campaign promises for both men is to offer you lots of tax cuts and/or new programs the country doesn't have the money for.

Like everyone else, we're praying that the U.S. bailout and the world's central banks can put out this financial fire, fast. Realistically, the country is going to be adding a lot to the national debt over the next few years. There's no way around it, and frankly balancing the budget during a recession is difficult and may not even be advisable. But once we've got the private sector's bad debts under control, we've got to get the federal government's debt under control, too. The long-term problem for the federal government is predictable, inevitable -- and completely solvable, if politicians show some leadership and the public starting demanding some real answers.

Bush Administration Adds $4 Trillion To National Debt

September 29th 2008

UNITED STATES - With no fanfare and little notice, the national debt has grown by more than $4 trillion during George W. Bush’s presidency.

It’s the biggest increase under any president in U.S history.

On the day President Bush took office, the national debt stood at $5.727 trillion. The latest number from the Treasury Department shows the national debt now stands at more than $9.849 trillion. That’s a 71.9 percent increase on Mr. Bush’s watch.

The bailout plan now pending in Congress could add hundreds of billions of dollars to the national debt – though President Bush said this morning he expects that over time, “much if not all” of the bailout money “will be paid back.”

But the government is taking no chances. Buried deep in the hundred pages of bailout legislation is a provision that would raise the statutory ceiling on the national debt to $11.315 trillion. It’ll be the 7th time the debt limit has been raised during this administration. In fact it was just two months ago, on July 30, that President Bush signed the Housing and Economic Recovery Act, which contained a provision raising the debt ceiling to $10.615 trillion.

Deputy Press Secretary Tony Fratto declined an invitation to comment on the enormous jump in the national debt during Mr. Bush’s presidency. He referred me to OMB – the Office of Management and Budget, which tried to make the case that as a percentage of the economy, the national debt is not that big.

In its budget documents in February, OMB estimated that next year’s national debt would hit $10.4 trillion – which it said would amount to 69.3 percent of the gross domestic product – the standard measure of the size of the economy.

That’s high – but far from an all-time high. After World War II, the national debt soared to over $270 billion – a quaint figure by today’s standards. Numerically, it’s less than the amount of federal budget deficit we now run up in a single year. But back in 1946, the Debt amounted to 121.7 percent of the size of the total economy.

By the time Richard Nixon began his second term in 1973, the national debt had grown to $466 billion – though as percentage of GDP, it had fallen to 35.7 percent.

Today, OMB press secretary Corinne Hirsch, renewed the oft-made government argument that reporters should focus on just that part of the national debt that is held by the public – now about $5.6 trillion and not include that portion billed as “intra-governmental holdings” – money the government owes itself – especially the Social Security and Medicare trust funds.

Of course, the government doesn’t have that money either. It’s been spent.

President Bush made that point himself on April 5, 2005, when he paid a visit to the offices of the Bureau of the Public Debt in Parkersburg, W.Va.

He was shown a white file cabinet with keypad locks on each of its four drawers in which the Social Security Trust Fund is stored. On that day, there was no cash – as he noted in a speech later in the day.

“There is no 'trust fund,' just IOUs that I saw firsthand, that future generations will pay – will pay for either in higher taxes, or reduced benefits, or cuts to other critical government programs,” he told an audience at West Virginia University.

The government didn’t have the money it owed itself back then – and still doesn’t.

A couple of weeks after he took office, President Bush addressed the Republican Congressional Retreat in Williamsburg and declared that his budget “pays down the national debt.”

In recent years, President Bush almost never mentions the national debt.

Bank bailout: What it means for taxpayers

September 25th 2008

UNITED STATES - Treasury officials and congressmen are scrambling to find a viable solution to what been dubbed the worst financial meltdown since the Great Depression, and are tossing around figures unimaginable to most “regular folks.”

The latest amount being discussed in Washington is $700 billion, which would come at the taxpayers’ expense.

If the three-page act is passed as is, what would this mean to the taxpayer? Dr. John Yeutter, associate professor of accounting and Certified Financial Planner, explained the situation in layman’s terms.

“Let’s put this in perspective,” said Yeutter. “The U.S. Federal Government collected $2,568 billion in fiscal year 2007, while spending $2,730 billion, generating a total budget deficit of $162 billion. This proposal asks for more than 25 percent of last year’s collections. This is more than the government spent on defense ($549 billion), Social Security ($581 billion), or Medicare and Medicaid ($561 billion) last year. So we’re talking about ‘real money’ here.”

Yeutter indicated this money will come by increasing the federal debt, and will have to be paid back somehow.

“So our children and our grandchildren will have to pay for the mistakes of a few executives on Wall Street, through future taxes,” he said. “So we shouldn’t expect anything but tax increases until this debt is paid.”

Indeed, a review of the text of the bill, available at the New York Times Web site, provides a stark – some might say frightening – plan that would leave U.S. Treasury Secretary Henry Paulson in charge of running the whole show.

Particularly sobering is Section 8 of the three-page document, which states: “Decisions by the Secretary [of the Treasury] pursuant to the authority of this act are non-reviewable and committed to agency discretion, and may not be reviewed in any court of law or any administrative agency.”

If passed, not only would the legislation increase the national debt to $11.3 trillion, it would leave one man in charge with absolutely no oversight.

According to a report by the Associated Press, Federal Reserve Chairman Ben Bernanke warned Congress Wednesday they risk a recession if the plan is not approved immediately, as is.

Yeutter is concerned about the act and its potential long-term effects on other programs.

“We all hope that the government has the ability to stop what might be a crisis of similar proportions to that which brought on the 1929 depression,” he said. “The difficulty that exists here is that our lawmakers are being told, ‘Give us this blank check, or the economy will collapse,’ and the current proposal has little in it to provide protection for the citizen taxpayers who are funding it, or accountability from the secretary of the Treasury who will administer it. This also means the next administration, whoever that may be, will be left with less available funds to spend solving other economic or social problems, like health-care costs, health-insurance costs or education.”

The latest U.S. Census information indicates there are 116 million households in the U.S. – given that information, the cost per household for this proposal equals approximately $6,000.

What some may find even more disconcerting is there is no “Plan B,” should this plan fail.

According to Eamon Javers, writer for Politico magazine, if this week’s bailout plan fails, the government will probably have no choice but to continue to buy up assets, which could include credit-card debt, car-loan debt, as well as commercial real-estate debt, until the problem abates or taxpayers gain control over the banking system.

Bush's Legacy: Debt

September 25th 2008

UNITED STATES - The Bush legacy is going to include a nasty four-letter word: debt.

On second thought, make that staggering, long-term debt, perhaps in excess of $11 trillion, that will tie the hands of the next president and Congress, to say nothing of imposing a crushing burden on taxpayers.

Just a few months ago, the Iraq war looked like the biggest thing in the eight-year era of the second President Bush, during which his party controlled Congress for six years.

Just a couple of Sunday mornings ago, Bob Woodward of the Washington Post said on national television that the war in Iraq “is probably the most important thing going on right now,” adding that in January the war in Iraq will be topic one in the next administration, and topic two will be the war in Afghanistan.

Now the country suddenly is facing a financial crisis fraught with the possibility of unprecedented economic disaster.

If that isn’t enough to make you reach for the antacid tablets, the president still has about three months left in office, plenty of time for yet another calamitous turn of events.

The national debt was about $5.7 trillion when Bush took office in January 2001. Today, after almost eight years and a couple of wars, the debt has risen to about $9.7 trillion.

And, by the way, that figure might rise another $1 trillion or so before Bush steps down on Jan. 20.

The national debt ceiling today is $10.6 trillion. Treasury Secretary Henry Paulson wants Congress to raise that to $11.3 trillion to clear the decks for massive borrowing to deal with the nation’s financial crisis.

A national debt of $11.3 trillion would come to more than $37,000 each for every man, woman and child in the United States.

And all this comes during an era of allegedly conservative, fiscally responsible Republican domination in Washington.

U.S. debt could hit WWII levels

September 24th 2008

UNITED STATES - $700 billion plan may drive the budget deficit next year to all-time record of more than $1 trillion.

Treasury Secretary Henry Paulson's $700 billion (U.S.) proposal to stabilize the banking system may push the national debt to the highest level since 1954, threatening an erosion of foreign appetite for U.S. bonds.

The plan, which asks Congress for funds to buy devalued securities from financial institutions, would drive the debt above 70 per cent of gross domestic product and the annual budget gap to an all-time high, possibly exceeding $1 trillion next year, economists estimated.

"This is sobering, absolutely sobering, even to someone who doesn't drink," said Stan Collender, a former analyst for the House and Senate budget committees, now at Qorvis Communications in Washington.

At risk for the world's largest economy: a jump in interest rates prompted by the glut of additional Treasuries needed to finance the plan, and a diminished desire among international investors to add to their holdings. The dollar yesterday slid the most against the euro since the European currency's 1999 introduction.

Paulson is asking lawmakers to lift the legal ceiling on the federal debt to a record $11.3 trillion, from the current $10.6 trillion.

Treasuries fell in the past two trading days after Paulson said on Sept. 18 that a sweeping rescue was needed. Gross U.S. debt, which includes debt held by the public and by government agencies, this year reached about $9.6 trillion, or about 68 per cent of gross domestic product.

The Treasury is already borrowing to fund Federal Reserve efforts to inject liquidity into credit markets. Last week it announced sales of $200 billion in short-term debt.

The Treasury's potential use of all $700 billion to purchase impaired assets would raise the country's debt to more than 70 per cent of GDP. The last time American taxpayers owed as much was in 1954, when the nation was still paying down costs incurred during World War II.

"It's an alarming level of debt given that we're not fighting something like World War II," said Robert Bixby, executive director of the Concord Coalition, a non-partisan budget watchdog group.

The government reaching the requested debt limit would entail every man, woman and child in the U.S. owing more than $37,000 each. The median U.S. income last year was $50,233.

If Treasury spends the entire amount next year, as some economists expect, it would drive next year's budget deficit, now projected to be around $500 billion, to $1 trillion or more. Still, the money for the Paulson plan will go to buy assets at prices that many market analysts say are depressed. Though it's still far from clear what price the Treasury would pay for them, it's possible those assets could increase in value as the crisis recedes and, as was the case with the government's 1979 bailout of Chrysler Corp., taxpayers could ultimately profit.

Our kids will pick up the cheque for our financial mess

September 23, 2008 - Our kids ought to be hopping mad.

UNITED STATES - This whole financial crisis is essentially the consequence of binging on debt. And to get ourselves out of it, we are about to binge some more without showing the slightest inclination to pay for it.

The Bush administration's bailout plan for a financial crisis rooted in failing mortgages is pretty simple.

It asks Congress to increase the national debt ceiling to $11.315 trillion to cover $700 billion in new borrowings so the Treasury Department can buy bad loans.

"We're charging the national credit card. It's more of the same, just in larger numbers," said budget deficit hawk David Walker, president of the Peter G. Peterson Foundation.

President Bush called China's President Hu Jintao Monday morning to discuss all this – as well he might.

China holds more than $502 billion in U.S. treasuries.

Count the paper issued by Fannie Mae and Freddie Mac, along with debts bought in London's financial market that aren't identified in the official statistics, and China's holdings look more like $1 trillion to $1.3 trillion, estimates Brad Setser of the Council on Foreign Relations.

"That's enormous – close to 10 percent of our GDP," Mr. Setser said. "So China is understandably interested."

China's Xinhua news agency paraphrased Mr. Hu's views on the conversation this way:

"We have noticed that the United States has taken some important measures to stabilize the domestic financial market, and we hope these measures can achieve quick results so that economic and financial conditions in the United States will gradually improve and turn better."

Mr. Bush did not need to rattle the cup, but that's part of the underlying story here. We need Asian creditors to prop up the system.

Japan's stake

Japan's central bank, for example, holds more than $592 billion in U.S. treasuries.

Look at some of Monday's other news:

Morgan Stanley is selling up to 20 percent of itself to Japan's Mitsubishi UFJ Financial Group "as soon as practicable."

Nomura Holdings, Japan's largest brokerage, is buying the Asian operations of bankrupt Lehman Brothers for a reported $225 million.

Britain's Barclay's is buying Lehman's investment banking business for about $1.35 billion.

There will no doubt be more international deals in the days ahead.

It might be sad to see the flags of giant domestic finance houses fall to sales abroad, but the most important global consequence of the financial bailout will be what we borrow.

Debt ceiling

If Congress moves the debt ceiling to $11.3 trillion, that will bring the national debt to 79 percent of the $14.3 trillion economy.

It hasn't been that high since World War II, when federal borrowings equaled 120 percent of the gross domestic product.

None of that wartime debt was owed to foreign creditors, however.

Today, more than 25 percent of the national debt is owed to Mr. Hu and other international lenders.

Consider the leverage of these creditors.

For now, China, Japan, Saudi Arabia, Brazil, Russia and others are bankrolling the U.S. government.

It's in their interest to do this because it prevents the global financial system from seizing up and because it keeps us in cash to buy consumer goods from Asia and oil from the oil producers.

It looks odd for the United States to hector these same countries about human rights and other behaviors, however, when we owe them so much money.

Now we're about to double down on our borrowing.

Before the Treasury and the Federal Reserve moved to bail out Fannie Mae, Freddie Mac, AIG and now the whole of Wall Street, the federal deficit was expected to approach $500 billion next year.

With nearly $1 trillion in federal debt instruments pushed into these bailouts, however, the deficit will certainly be far larger.

How will we pay for that? We won't. Since this borrowing binge started, we've heard that economic growth will overcome the debt and knock back deficit spending.

It looks a lot more like we're leaving the cheque for our kids.

Barack Obama Wins

Congratulations to Barack Obama, the new president of the United States.

Now he can reverse America's budget deficits and decrease America's National Debt.