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New York Times: U.S. Racing Toward Debt \ufffdShock\ufffd

Monday, November 23, 2009 1:51 PM

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A page one, top-of-the-fold New York Times report Monday warns that
U.S. debt is rising so fast that the federal government is careening
toward a "payment shock" in the not-too-distant future.

The Times lead headline read: \ufffdFederal Government Faces Balloon
in Debt Payments: At $700 Billion a Year, Cost Will Top Budgets for 2
Wars, Education, Energy.\ufffd

The Times headline appears eerie just as the Senate moves to push
forward on a radical healthcare reform \ufffd with CBO estimates for a
final bill costing nearly $1 trillion dollars over the next year.

The national debt now stands at over $12 trillion and the White House
estimates that the cost of servicing the debt will rise to more than
$700 billion a year in 2019, up from $202 billion this year. The Times
suggests that $700 billion annual payment cost may be conservative.

The additional $500 billion a year in interest payments would surpass
the combined budgets this year for education, energy, homeland
security, plus the wars in Iraq and Afghanistan, the Times observes.

Treasury officials face not only huge new debts incurred in response
to the economic meltdown but a balloon of short-term borrowings coming
due in the months ahead, and interest rates that are certain to return
to normal levels when the Federal Reserve concludes that the fiscal
emergency has passed.

"Even as Treasury officials are racing to lock in today's low rates by
exchanging short-term borrowings for long-term bonds, the government
faces a payment shock similar to those that sent legions of
overstretched homeowners into default on their mortgages," The Times
reported on Monday.

Interestingly, the alarming Times analysis comes as the nation is in
the midst of a debate over healthcare reform proposals that could add
many billions of dollars to the overall debt.

Record deficits have arrived just as payments for Medicare and Social
Security benefits are set to explode, with the oldest Baby Boomers
approaching age 65. This will result in what experts have long warned
will be a "fiscal nightmare" for the government, the Times article
notes.

"What a good country or a good squirrel should be doing is stashing
away nuts for the winter," William H. Gross, managing director of the
Pimco, a bond management firm, told The Times.

"The United States is not only not saving nuts, it's eating the ones
left over from the last winter."

As for the balloon of short-term borrowings coming due, that debt now
accounts for 36 percent of overall debt, compared to the historic
average of less than 25 percent, and more than $1.6 trillion is due by
March 31.

Another problem: The Federal Reserve's purchases of Treasury bonds and
mortgage-backed securities to prop up the economy pushed down
long-term interest rates by about half of a percentage point, but the
Fed is set to reverse those policies \ufffd that alone could add $40
billion to the government's annual debt service expense.

The Treasury Borrowing Advisory Committee, a group of market experts
that advises the Treasury on debt management, declared this month:
"Inflation, higher interest rate and rollover risk should be the
primary concerns. Clever debt management strategy can't completely
substitute for prudent fiscal policy."

And The Times warns: "There is little doubt that the United States'
long-term budget crisis is becoming too big to postpone."

I firmly believe that nothing will start the coming revolt faster than when
all of the governemnt workers who were enticed into following the Pied Piper
start getting stiffed on their checks. "OOOOOOO, Mr. Obama gonna pay my
mortgage, gonna pay mah cah payment, gonna buy mah gas." I wonder where
that bitch is today. I'd like to see an interview with her. But mostly, I
want to see all the recent government hires that were voting shills and
voting registration goons start having their checks bounce. With that
crowd, it ain't gonna take long for someone to go give the man an attitude
adjustment.

BWAHAHA.

The feces are approaching the spinning fan blades.

Steve

I believe that you guys are referring to this newsMax article:

http://moneynews.newsmax.com/headlin...23/289782.html

That article is a very simplified and editorialized paraphrasing of a
another article from NY Times (much more detailed), which is a must
read for anyone who actually has some money at risk, like, let's say,
SteveB.

http://www.nytimes.com/2009/11/23/business/23rates.html

That NY times article builds on top of a theme that was initiated by
Warren Buffett in August of this year in another NY Times editorial:

http://www.nytimes.com/2009/08/19/op...19buffett.html

Yours truly wrote about this "debt shock" several years ago, in this
newsgroup IIRC, when I pointed out that an increase in interest rates
will increase debt servicing costs and deficits, and that could have
increase interest rates even further, leading to "snowball effect" of
increasing debt servicing costs that raise decicits, which leads to
higher interest rates, ad infinitum.

This is not a new problem, in other words, this is the old problem
that is made continually worse by the ongoing deficits.

The fear, of course, is that unsustainable debt would lead to
devaluation of currency.

TO evaluate that devaluation risk properly, we need to consider it in
the context of other countries.

The debt problem is not a US only problem.

As the NY times article points out, other countries such as Japan,
Germany, Britain and so on, have even worse debt loads in relation to
GDP.

Those countries are as much, if not more, at risk of having to debase
their currencies, as is the US.

Thus, to someone who wants to hedge their dollar exposure, converting
dollars to other currencies may be a wrong answer, as those currencies
face the same risks.

This may partly be an explanation for the current mad rush into
gold. Gold is a physical asset that, unlike paper money, cannot be
diluted due to limited supply of gold.

Would gold be a good vehicle for preserving purchasing power?

I cannot know the future, but am not at all convinced of this, and
will not be participating in the current gold rush. My main concern
about this is that gold presently generates too much interest among
the investing public, including people whom I consider fools.

What I do know is that I personally avoid
1) Buying any long term debt at current interest rates
2) Owing any substantial money on a rolling short term basis. I
recently refinanced by mortgage from 15 years fixed to 30 years fixed
due to inflation concerns.

Most, though not all my assets are in forms that should not lose value
due to inflation.

The best summary of the situation is that the US debt is not
unmanageable, but is at risk of becoming so.

i