America’s Debt Crisis Explained

27 Replies to “America’s Debt Crisis Explained”

1. Someone should post this to Trudeau and his Liberal minions, even they should be able to understand this presentation.

2. Bet your boots!?

3. “even [Trudeau and his Liberal minions] should be able to understand this presentation.”…
   …NOPE.

4. When the debt is 100% of GDP with a zero interest rate, there is no chance of ever paying it off unless some sort of miracle takes place in the American economy.
   Bringing government spending in line with revenues cannot do it.
   The 2012 Presidential Election was America’s last chance* and they blew it.
   Videos like this are made to calm investors and keep them from bolting, because down is the only possible direction for the American economy.
   *it might have been too late even then

5. The presentation could have made it even simpler to understand by putting it in personal terms. The $17 trillion constitutes a personal debt burden on each living person in the US of $55,000. With the debt growing at about $1 trillion annually, that means the personal debt load grows for every living breathing American by about $3300 each year at a compounding rate of about 5%. In short, $17 trillion, or $55,000 per person grows to a personal debt load of about $100,000 by the end of this decade.
   But of course the ability to service this debt is not divided evenly. Barely half the US citizenry pays taxes of any kind. So this really means that it’s about $100,000 per tax-paying income earner now and doubling that by the end of the decade. In short, it’s like having a second mortgage, not a huge one right now, but it has that size of impact.
   So the Americans are in trouble, very serious trouble. And if they don’t start immediately on solutions to it, it’s trouble of an existential kind. Nations have utterly destroyed themselves because of debt overburdens. Just ask the 17th century Spanish Habsburgs. From leading world power to nothing in barely three decades.
   As the video pointed out there are solutions, but none of them are politically salable to either part of the political spectrum right now. It will take a truly existential crisis for the American political system to focus on this problem.

6. The only way out is war, it has happened before and will again. When you blow the debtor nation to smithereens, they are just happy you stopped killing them, they are not too worried about the debt you anymore.

7. Related: Can anyone explain to me why the Canadian dollar has dropped so much in value over the past few months?

8. Yes, manipulation…just like the gold market over the last two years.
   Also it juices the manufacturing sector in Ontario, which relies on exports in spite of provincial LIEberal mismanagement.
   Cheers
   Hans Rupprecht, Commander in Chief
   1st Saint Nicolaas Army
   Army Group “True North”

9. That’s easy. The Canadian dollar appreciated in value for two reasons: 1. a surge in commodity prices partiularly in those things Canada produced like oil, minerals; and 2. Canada was used in a small way as a safe haven for bond investors immediately after the 2007-8 financial crisis. That latter trend continued, as Canada led the way in GDP growth throughout the period up to the end of about 2012.
   However, commodity prices have tanked somewhat over the past year or so. So that deals with reason #1. As for #2, the signs of strengthening of the US economy over the past year or so means that more money is flowing into US denominated securities and out of small boutique currencies like the Cdn dollar or Swiss franc. By contrast, Canada’s economy did very little last year. Job growth and economic growth is mostly stagnant, particularly in Canada’s largest provinces. In short, growth in assets denominated in Canadian dollars is pretty unspectacular these days. Hence the capital flight and relative decline in the dollar’s value.
   Both reasons 1 and 2 are approximately equivalent in weight in terms of the recent rise and decline in dollar value.

10. Oz, this comment is silly:
    “When the debt is 100% of GDP with a zero interest rate, there is no chance of ever paying it off unless some sort of miracle takes place in the American economy.”
    If that were so, no householder with an average annual income of $50,000 could ever undertake a mortgage of more than $50,000 “without a miracle”. The ability to carry debt is entirely dependent upon the sustained (not momentary) rate of growth in the economy and the sustained (not momentary) growth in the debt. Also critical is the proportion of debt to total asset. Both of these factors represent the ability to carry both debt load and its growth.
    The problem with the US is that its debt is now unsustainably high with insufficient revenue coming in to carry it. There are several stock solutions which can solve this problem, none of which constitute “a miracle”.
    1. The US is the only industrial nation which has no national sales tax. A 3-4% sales tax would wipe out at least half the national deficit.
    2. The US has undertaken huge new social programs with no revenue stream to pay for them. Most notably their government funded prescription drug program. A user fee, even a small one of $10-20 per prescription, would cut the social spending losses hugely.
    3. Unlike Canada, the US had never reformed is social security program. Even a modest increase in worker contributions would stop the bleeding in both current and future net payouts from old age security.
    There are also literally hundreds of other smaller measures which would help the situation enormously, though not to the degree these three would. Any solution to the US problem will have to come from a mix of spending cuts and revenue increases.
    The reason none of these things are being implemented or even talked about is because of political paralysis in Washington. And until there is an existential crisis, none of them will be.

11. Far too much wishful thinking, unfortunately.
    He ignores the fact that every time the economy experiences ‘robust growth’, politicians don’t say “ooh, let’s pay off the debt!” – they say “oooh, what else can we spend money on?”.
    Naturally, the additional spending never goes away, even when the economy slows. Thus, our current situation.

12. The market is not necessarily rational although in the long run, is self-correcting (usually too far). The same financial market herd that likes Tesla at 600 times future earnings views the Loonie as too commodity related and therefore in a risk-off trade, considered not as secure as the relative safe haven of the current world’s reserve currency, the US dollar. That form of mass hysteria will persist until triggered by events into changing. In terms of fundamentals, Canada is running a significant trade deficit but has rates fixed at higher short term yields which sends mixed signals to the FX market.

13. In the long run, asset values are based on fundamentals. From this point of view, Canada is as strong, or stronger, than any of the other major economies. Only major stupidity at the Federal level will alter that.

14. http://www.marketoracle.co.uk/Article44348.html
    As you can see from the graphs, gold was forced lower while the stock market futures were forced higher. There was no apparent news or market events that would have triggered this type of reaction in either the gold or stock market. If anything, the trade deficit report, which showed a higher than expected trade deficit for December, should have been mildly bullish for gold and bearish for the stock market. Furthermore, at the same time that gold was being forced lower on the Comex, the U.S. dollar index experienced a sharp drop in price and traded below the 81 level of support. The fall in the dollar is normally bullish for gold.
    The economy is getting weaker. Fed policy is obviously failing despite recent official pronouncements that the economy is improving and that Bernanke’s monetary policies succeeded. A just published study by Jing Cynthia Wu and Fan Dora Zia concludes that the the positive impact of the Federal Reserve’s policy of quantitative easing is so slight as to be insignificant. The multi-trillion dollar expansion in the Federal Reserve’s balance sheet lowered the unemployment rate by little more than two-tenths of one percent, raised the industrial production index by 2 percent, and brought about a mere 34,000 housing starts. http://econweb.ucsd.edu/~faxia/pdfs/JMP.pdf [3]
    The renewal of the battle over the debt ceiling limit is bullish for gold and bearish for stocks. However, with the ongoing manipulation of the gold price and stock averages via gold and stock market futures, the normal workings of markets that establish true values are disrupted.
    A rising problem for the manipulators is that the West is running low on gold available for delivery to China and other Asian buyers. In January China took delivery of a record amount of gold. China has been closed since last Friday in observance of the Chinese New Year. As China resumes purchases, default on delivery moves closer.
    One way for the Fed and bullion banks to hold off defaulting on Chinese purchases is to coerce holders of gold futures contracts to settle in cash, not in delivery of gold, by driving down the price during heavy Comex delivery periods. This is what likely occurred on Feb. 6 in addition to the Fed’s routine price maintenance of gold.
    Cheers
    Hans Rupprecht, Commander in Chief
    1st Saint Nicolaas Army
    Army Group “True North”

15. Robert W; I’ll add my couple of cents (even though the penny has gone)to other commenters on your question. A question meant to enlighten I think.
    The standard answer is Canadian productivity is usually somewhere between 10&15% lower than in the U.S.A. This is true to a certain extent normally expected because of the smaller production runs in the country which has a population of about 10% of the U.S.A. population.
    However this started to be untrue with establishment of the Automotive Pact in the early 1960’s. The Canadian automotive industry was now in a position to quote on production runs for the total North American automotive market. This was also true for the American automotive industry now able to include the Canadian automotive market in their production runs.
    It took several years for this to settle out and it was as beneficial for Canadian auto workers as it was for American auto workers.
    The difference in the price of cars in the two countries was then only attributable to greater tax levels. This was apparently acceptable to Canadians and also acceptable for the taxes to be used for Government programmes, such as basic health coverage and pension plan.
    This has been a contributing factor in the opinion Canada was not as safe a place to tie up one’s investment as in the U.S.A. Smaller population, higher taxes and greater social costs.
    The social cost meme became especially concerning in the 1970’s and through the 1980’s. The Liberal Government was replaced with a Conservative Government who were forced to raise taxes enough to at least cover the interest cost of the accumulated deficit through the 1970’s. But this again affected the image of a high tax country.
    The successful efforts of the Brian Mulroney and Ronald Reagan Administration’s brought the same benefits to all Canadian and American production which was proven with the Auto pact by establishing the Free Trade Agreement. The greatly increased volume for the Canadian production and the ability for the American production to gain from increased capacity usage has established an integrated economy.
    The political cost for the Conservatives was dramatic. The succeeding Liberal Government was forced to take control of the cost of the social programmes when Canada was being called a “third world country” in the international media. This was done through downloading costs to the Provinces to hide them and then gutting the funding for the Canada Health Act.
    Naturally these added to the image of Canada as not really as trustworthy as the U.S.A. First we are now very dependent on the American economy for production in a globalizing world and the largest province, Ontario has been unsuccessful in curtailing the costs endemic in their brokerage approach of catering to the less productive methods of financial control. Both are taken into consideration with the ongoing instability of having a continuing run of Quebec separatist Rhetoric.
    Not sure if this is a ramble or some background information on how we got to be where Canada is, at this time, still not recognized for our increasing capability as a country to meet the challenges of the future. Cheers;

16. The next election is tomorrow; the future fifty years down the road. Such is the way of the politician.

17. Who is he trying to convince?
    Seems to me the 30 and younger crowd will already understand this, if they have a real job.
    We are a basket case, the best of the worst seems to be Canada’s bragging card.
    The social costs we have come to call normal, can not go on.
    That national debt and the infrastructure deficit should be enough to see this.
    Then 1:4 works for government or in non producing work, the other 3 are expected to carry this dead wood.
    Debt just keeps on growing, as does the ranks of the parasites.
    We keep pretending emigration will solve our structural problems, we are gonna need some spectacularly dumb immigrants.
    At what level does government theft become slavery?
    Who says what is a “reasonable” income?

18. Absolutely superb insight, Mike. Thank you!

19. I have a small issue with the supposition that the senior generation was kicking the debt can further down the road. My entire working life, the deductions that were taken from my pay cheques were the assurance that anything I would receive when I retired was paid for in full. The fact that governments at all levels squandered my investment does not make me guilty of robbing the future generation, but does reek of incompetence by the political party in power for tossing my money into general revenue which is the pig trough all politicians feed from. When it comes to stealing from future generations the blame rests entirely on those that allow it to happen. Our politicians and the lack of respect for taxpayers money.

20. Peter, your supposition is generally true in Canada. The problem is that the programs like CPP were originally set up with an expectation of much higher rates of return than is the case today. And it was reasonable to project 10+ per cent compounded return in the ’60s-’90s, but it’s no longer valid now.
    That’s why the federal government starting with the Chretien government refinanced the CPP and UI with much higher contribution rates from both employers and employees. However, the Americans have never made the necessary adjustments, so the future deficit of social security grows. There are two straightforward solutions: cut benefits and/or increase contributions, but the political deadlock in Washington won’t allow this to be addressed.
    And as I said before, the US government under George Bush with a Democrat Congress put in place a universal prescription drug program with NO revenue stream to pay for it. That’s the huge monster that over the last 6-8 years has shoved the federal fiscal deficit sky high.

21. “programs like CPP were originally set up with an expectation of much higher rates of return than is the case today”
    and also because of expectation of a much higher Total Fertility Rate (TFR) than what Canada has now. With TFR dropping from 3.8 to 1.6, the potential tax base has shrunk considerably.

22. I’m very suspicious of Ontario’s Katherine Wynne’s promotion of a “made in Ontario” pension plan. I’m betting that the premiums (AKA taxes)will not be invested, but rather transferred (lent) to general revenue and replaced with IOUs with some notional rate of return.

23. Exactly right.
    However we allowed the parasites to breech the contract they made with taxpayers.
    By force we, the govt, will take this wealth from you who produce.
    In return, we will ensure you, the taxpayer, receive, healthcare, welfare,Old age care…
    Oh sorry, no money, please wait for next available server,no money for these services..
    Could you taxpayers, please give us more.
    Pay up or go to jail. Suckers.
    Theft by government has not been punished by us voters.
    The Liberals, The Mulroney PC’s made careers of of bare faced fraud and theft.
    This culture is rampant in Ontario and Quebec, voters so disconnected from reality, that they are robbed blind, bribed with a fraction of their own money and continue to reelect the flim flam artists who openly steal the bulk of this loot.
    I can’t fix stupid.
    But I refuse to have stupid lording it over me, with my money.

24. good read folks, as, I don’t keep up with general fiscal trends I need some tutoring:-)))
    ad cgh, thanx for taking Ooooz’ stupidity to task, as I was going to.

25. Rizwan, the maintained immigration rate was to compensate for dropping fertility rate, which it does. But it can’t compensate for lower GDP growth, and it can’t compensate for lower productivity than most of the OECD nations.

26. Precisely right, Neo. The Ontario Liberals are not to be trusted with this. How many times has Wynne whined that she needs additional “revenue instruments”?
    Of course it will get filled up by IOUs, just as the US government is now filling up Social Security with IOUs, with net payouts exceeding net incoming for the first time ever last year.
    What Wynne needs is to get the teachers’ and public sector unions under control, but she can’t do that because those are precisely (and possibly the only) people who vote for her. So she tries to set up a new retirement fund so she and Chuckie Souza can raid it for their various program boondoggles.

27. In speaking about corruption within the Canadian judicial system – it is our pleasure to present the;
    Buck For Justice – Website – http://www.broderbuck.com
    All Justices and lawyers have been caught for fraud, perjury, forgery, backdating and deleting audio from trial recordings.
    The beauty is this site was written to use the Court documents to convict the legal system – that is Justices and lawyers.