Losing control of the US debt machine

“The US is insolvent,” says a report from a hedge fund. As of the third quarter of last year, the federal government had assets of $2.67 trillion and total liabilities of $14.12 trillion.

That leaves a net negative position of more than $11 trillion. By the way, this is projected to get a lot worse, fast. The feds are expected to increase their debts by about $3 trillion more over the next 2 years. Federal spending is out of control…the feds have lost control of their own budget, let alone the economy.

Typically lenders look for what they call ‘debt coverage’ – debt compared to revenue. If you take the US revenue as a whole, you find federal debt currently equal to a bit more than 80% of GDP. But that number is going up quickly. It will be over one hundred percent in just 2 or 3 years.

Well, so what? As long as you have the income to support it, you don’t worry, right? Well, let’s look at it from that angle.

Hmmm… Doesn’t look so good from that perspective either. The income tax only generates 43% of the budget. The feds get a little more from corporate and other taxes, but the deficit is enormous…from a third to a half of all expenditures.

This is not looking good. Most of the deficits do not come as emergency reactions to a financial crisis. Most of red ink is ‘structural’ – the result of programs already in place before the crisis hit. They are hard to curtail, since it requires major acts of political will to undo them. So, they tend to continue.

Which means, the US needs to borrow huge amounts of money just to continue drifting along in the style to which it has become accustomed. There is no end in sight to the deficits…no practical way to reduce them…and no way out of the debt whirlpool. Which means, financing them has got to be a losing proposition for the lenders.

Nothing new in that…

Still, we drift…we wander…we float from one bank to the other…and wonder when we will finally sink.

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