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a cliff notes guide to the US balance sheet


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By Satyajit Das, derivatives expert and the author of Extreme Money: The Masters of the Universe and the Cult of Risk Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives – Revised Edition (2006 and 2010)

 

In the first of three articles, the problems of US debt are outlined. The next two articles look at how America needs to control its public debt and how given political exigencies it may actually be dealt with.

 

Greece and the other debt burdened European countries are merely the first carriages in the derailment of the “Sovereign Debt” Express train service to nowhere. The big carriage has ‘USA’ painted in red on it.

 

To understand the US financial position, just remove 8 zeros and pretend it’s a household budget (The analogy was originally suggested at http://www.globalresearch.ca:80/index.php?context=va&aid=27707):

 

Annual family income: $21,700

 

Money the family spent: $38,200

 

New debt on the credit card: $16,500

 

Outstanding balance on the credit card: $142,710

 

The US is trying to bring their budget under control. This year they implemented total budget cuts of $385. Assuming they don’t spend more than they raise in taxes, it will take them 370 years to pay back this debt. The bi-partisan US Super Committee is currently discussing proposals to cut spending by $12,000 over 10 years. At $1,200 in saving per year and assuming they balance the budget, it will then take them a mere 119 year to pay back the debt.

 

That should clarify the position.

 

At Debt’s Door

 

Ralph Waldo Emerson wrote: “The World owes more than the world can pay.” The US certainly owes more than it can repay.

 

US government debt currently totals over $14 trillion. The US Treasury estimates that this debt will rise to around $20 trillion by 2015, over 100% of America’s Gross Domestic Product (“GDP”). Even these dire forecasts rely on extremely robust assumption about US growth around 5-5.5% per annum. Lower growth will translate into higher debt levels.

 

The rapid increase in debt will require Treasury to borrow heavily each year to repay maturing debt and raise new money. Annual interest payments will eventually exceed all domestic discretionary spending and rival the defence budget.

 

There are other current and contingent commitments not explicitly included in the debt figures reported by the government. Since July 2008, the US government has supported Freddie Mac and Fannie Mae (known as government sponsored enterprises (GSEs)). This totals over $5 trillion in additional on or off-balance sheet obligations.

 

The debt statistics do not include a number of unfunded obligations – the current value of mandatory payments for programs such as Medicare ($23 trillion), Medicaid ($35 trillion) and Social Security ($8 trillion). Projections show that payouts for these programs will significantly exceed tax revenues over the next 75 years and require funding from other tax sources or borrowing.

 

In addition to Federal debt, US State governments and municipalities have debt of around $3 trillion.

 

the rest here:

 

http://www.nakedcapitalism.com/2011/11/satyajit-das-the-main-game-looms-the-problem-of-us-debt.html

 

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