Debt Delusion

Investors’ appear to be bored and complacent about the “debt debate,” if one can really call it a debate, going on in Washington.

Perhaps we can simplify the debate, which effectively covers two topics, an annual budget and any debt limit for the United States of America, euphemistically labelled, “the most prosperous country on the planet,” and one word, DEBT.

On the budget front, which the US has failed to set for three consecutive years now, the good folk at DecisionPoint.com, a fantastic charting service, sums it up as follows:-

“THE BUDGET PICTURE

It seems that discussions and news reports about the federal budget are deliberately framed to obfuscate the issues. We suggest that something like the following graphic be included in all news stories on the subject.

weekly_blog_131016_01

The numbers that are the basis of the graphic are as follows:

Of every dollar we spend, 54 cents comes from revenue (the money we collect in taxes), and 46 cents is borrowed and represents the deficit. The deficit is added to our cumulative debt, which is not depicted on the chart, being a whole other discussion. Another way to say it is that we borrow an amount that is 85% of our revenue. (Yes, the deficit is 46% of the total amount spent, but it is 85% greater than our revenue.)

Service on the debt (interest payments) is about 6% of the total budget, or 11% of our revenue. When interest rates go up, interest payments could easily increase by double and even more.

President Obama and the Republican House have to reach an agreement regarding raising the debt ceiling. If the debt ceiling is not raised, we will no longer be able to borrow and will have to live on only our revenue, and clearly some hard choices would have to be made. One of those choices would be whether or not to pay the interest on the debt, or default. That choice is solely in the hands of the Obama administration.

The numbers we have used in this commentary may differ somewhat from other sources, but we think they are, as they say, close enough for government work.

Conclusion:  We are in trouble.”

All that we would add to the above comment is, Interest rates are going up and aside of the choice being solely in the hands of Obama, or the markets.

Moving onto the second topic, the political infighting over the debt limit, or debt-ceiling, continues so perhaps it’s worth a reminder on just how this has ballooned over the past decade or so. 

weekly_blog_131016_02

Aside of it being patently unsustainable it also reminds of the massive increase in both Government and the underlying bureaucracies, funded by this debt, with the red-tape created by it becoming businesses’ number one concern.

Think of it as the Government’s credit card, better known as the debt ceiling, which at a near $US 17,000,000,000,000 is maxed out. Instead of turning to the credit card company for an increase in the borrowing limit, Uncle Sam has to turn to international lenders’, who wish to be compensated appropriately for the perceived level of risk.

Is 2.7% pa appropriate on a 10-year loan after looking at the chart above?

The word “delusion” comes to mind.

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