The American dream is dead

Debt is drowning the American Dream, U.S. borrowing and spending is at a crisis point:

Debt is drowning the American Dream

Debt is drowning the American Dream

U.S. government debt currently totals around $16 trillion. The Treasury estimates that this debt will rise to around $20 trillion by 2015, over 100% of America’s Gross Domestic Product. That’s not counting other current and contingent commitments not explicitly included in the debt figures — government support for Freddie Mac and Fannie Mae (known as government-sponsored enterprises) of over US$5 trillion and unfunded obligations of over $65 trillion for programs such as Medicare, Medicaid and Social Security. State governments and municipalities have additional debt of around $3 trillion. As Pimco’s Bill Gross wryly observed: “What a good country or a good squirrel should be doing is stashing away nuts for the winter. The United States is not only not saving nuts, it’s eating the ones left over from the last winter.” U.S. public finances have deteriorated significantly in recent years. In 2001, the Congressional Budget Office forecast average annual surpluses of approximately $850 billion from 2009–2012, allowing Washington to pay off everything it owed. The surpluses never came. The federal government has run large annual budget deficits of around $1 trillion in recent years. The major drivers of this reversal of fortune include: tax revenue declines due to recessions; tax cuts; increased defense spending; non-defense spending; higher interest costs and the 2009 stimulus package. Despite growing concern about the sustainability of its debt levels, demand for Treasury securities from investors and other governments has continued. Domestic investment, primarily from banks, which are not lending but parking cash in government securities, has been strong. Foreign investors continue to seek U.S. bonds as a “safe haven” — driven by fears about the European debt crisis. Rates also remain low, allowing the U.S. to keep its interest bill manageable despite increases in debt levels. The government’s average interest rate on new borrowing is around 1%, with one-month Treasury bills paying 0.1% per year and 10-year Treasury notes yielding around 1.7%. The Fed’s’ successive quantitative easing programs have been pivotal in allowing the government to increase its debt levels. Around 70% of government bonds have been purchased by the Federal Reserve, as part of successive rounds of quantitative easing. The strategy has helped keep rates low, enabling the government to service its debt. Clearly, this current position is not sustainable. Fed Chairman Ben Bernanke told the House Financial Services Committee that the U.S. faces a debt crisis: “It’s not something that is 10 years away. It affects the markets currently…It is possible that the bond market will become worried about the sustainability [of deficits over $1 trillion] and we may find ourselves facing higher interest rates even today.” Unless the underlying debt levels and budget deficits are dealt with, the ability of the U.S. to finance itself will deteriorate. The Treasury must issue large amounts of debt almost continuously — weekly auctions regularly clock in at $50-$70 billion — amounts unimaginable just a few years ago. The solution lies in bringing budget deficits down, through spending cuts, tax increases or a mixture of approaches. From any angle, the task is Herculean. Government revenues would need to increase by 20%-30% — or spending would need to be cut by a similar amount

 

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