Does the U.S. debt scare you?
Well it could, the national debt at $21 trillion dollars, just exceeded by 10 percent the U.S. gross national product (GNP) standing at $19 trillion. This amount of debt is equivalent to 69,268 dollars per person.
Yet, one has to see it in proportion, it is still reasonable compared to Japan with 235 percent, Greece at 181 percent and Italy at 132 percent of their GDP.
Even Singapore, a well governed and prosperous mini-state, has a national debt of 110 percent of GDP.
One has to understand that the U.S. national debt has two components; the greater one, with 15.3 trillion dollars is domestic debt, created by congressional overspending.
The balance of 5.7 trillion dollars is current account imbalance (more dollars leaving the United States than coming in). The bulk of this deficit is caused by our persistent imports from foreign countries exceeding our exports by typically $450 billion per year; meaning we will have $6.23 trillion of foreign debt by next year.
In reality, debt is nothing but another form of credit.
Consider foreign debt: Here the U.S. government pays for goods purchased by our importers from abroad with U.S. government bonds (instead of cash) bearing interest rates (depending on the duration of bond at between1.5 percent and 3percent).
This interest rate is typically paid by you, the taxpayer. At this time, Foreign governments hold 4.110 trillion dollars worth of U.S. government treasury bonds. Think, what would happen if they try to cash in only halve of it — an economic collapse would result!
Think about that the U.S. government holds a credit card accumulating $ 450 billion of debt year after year while never paying off the principal, which grows each year by about 2 percent of our GDP.
Our country therefore receives goods without paying for them, excepting the cost of the monthly interest rate. The whole scheme is a politically welcomed way of subsidizing our living standard.
Without it, the prices at Walmart might likely double.
This is akin to you purchasing a television with a credit card and refusing to pay the monthly balance. Except for the cost of paying interest on the outstanding balance, the TV therefore costs you very little. However, in contrast to our government, your TV might be repossessed by the bank holding your credit card.
Unfortunately for them, foreign governments cannot do that for practical and political reasons.
Japan with a debt exceeding their Gross National Product (GDP) by 135 percent.
Yet, despite such heavy debt burden, their economy hums along; albeit at a lower, barely sustainable level. What gives?
Japan has practically no foreign debt. Au contrair, the USA owes Japan 1.1 trillion dollars:
- The Bank of Japan skillfully kept interest rates on their bonds as low as low as possible, between 0.5 and 1 percent, thus keeping the interest burden as low as below 1 percent of their GDP.
- The overwhelming bondholders are Japanese citizens, thereby keeping the interest payments within the Japanese economy.
As is the case in the U.S., the Japanese Government does not expect, nor is it able to pay-off all bondholders.
Here is a simple explanation how a bond system works:
Consider the Japanese government being a bank which gives you a mortgage. You take the cash from the mortgage and build yourself a house. While you pay the interest on the mortgage, you have no cash to repay the mortgage principal. The bank knows this and keeps extending the mortgage terms. This is fine with the banks stockholders (Japanese bondholders) since they are satisfied with the miserly interest, thus avoid default on the mortgage loan.
You may wonder if a bondholder ever gets his money back. Yes, he will, if he waits 10 or 30 years (depending on the type of bond) when the government is obligated to re-purchase the bond. If you want your money earlier, you have to go to Wall Street and find a buyer for your bond. Sometimes, you have to lower the asking price for your bond in order to attract a buyer. This raises the interest rate on the bond.
The Federal Reserve Board (FRB) is very keen to make sure interest rates don’t increase too much. If that happens, the Fed prints money and purchase the bonds themselves. This is what is called maintaining an orderly market.
Akin to a Ponzi scheme, it is only the very last bondholder who gets stuck with a worthless piece of paper. I suggest, sell all your government bonds the moment the government starts to print new money.
Here is a paradox: If bond interest rates rise and the Fed purchases bonds to reduce interest rates, this increases the U.S. National Debt, due to the increase in Treasury Bonds. On the other hand, if the Fed allows the interest rates to rise, then again the U.S. National Debt raises due to higher interest payments on outstanding U.S. treasury bonds.
As you can see, the job of a Federal Reserve Chairman is not an easy one!
Here is an economic playbook of a modern government:
2.5 percent domestic debt increase (credit) = 2.5 percent GDP increase = 2.5 percent inflation.
You see everything is in balance.
Hans Baumann is a licensed engineer in four states and a member of Sigma Xi, the Scientific Research Society. He is an adviser to the dean of the University of New Hampshire Business School. Dr. Baumann has published manuals on valves and was a contributor to many works including the "Instrument Engineers' Handbook" and the "Control Valves Handbook." He has also published several books on business management and German history, including "Hitler's Escape," which suggests that Adolf Hitler did not commit suicide and survived World War II. In his latest book, "Atomic Irony" he proves that the Hirshoma Atom Bomb contained captured German Uranium. For more of his reports, Go Here Now.
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