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As a general rule, the most successful man in life
is the man who has the best information
The public debt is the money borrowed by the US
federal government. The government borrows the money through the issue of
securities by the Treasury and other federal government agencies.
Public debt has two parts:
- Intragovernmental
holdings - Treasury securities held in accounts administered by the
federal government ie the Social Security
Trust Fund
- Debt held
by the public - Treasury securities held by investors outside the
federal government ie Federal Reserve and
state and local governments
US debt increased by $1 trillion in 2008, $1.9
trillion in 2009, and $1.7 trillion in 2010. As of August 3, 2011, the debt
was $14.33 trillion dollars, of which $9.78 trillion was held by the public
and $4.56 trillion was intragovernmental holdings.
Standard and Poor's downgraded the credit rating of
the US by one notch from AAA to AA+ on August 5, 2011. The long term outlook
is negative and the rating could be lowered further, to AA, within the next 2
years.
“We were downgraded because of years of
reckless spending, not because concerned Americans demanded we get our
finances in order. The Washington establishment has spent us into near
default and now a downgrade, and here they are again trying to escape
responsibility for their negligence in handling the economy.” Ron Paul
US Congressman (R)
The US national debt is $14.33 trillion - almost 70%
of that debt is owned by Americans. The $4.5 trillion foreign owned component
of the US national debt is mostly owned by Asian economies.
America’s largest
creditors:
- Social
security trust fund: $2.67 trillion, 19%
- The Federal
Reserve: $1.63
trillion, 11.3%
- China: $1.16 trillion, 8%
- US households: $959.4 billion, 6.6%
- Japan: $912.4 billion, 6.4%
- State
and local governments: $506.1
billion, 3.5%
- Private pension funds:
$504.7
billion, 3.5%
- United Kingdom:
$346.5
billion, 2.4%
- Money
market mutual funds: $337.7 billion, 2.4%
- State,
local and federal retirement funds: $320.9
billion, 2.2%
- Commercial banks:
$301.8
billion, 2.1%
- Mutual funds: $300.5 billion, 2%
- Oil exporting
countries: $229.8
billion, 1.6%
Asian’s are buying US Treasuries to stem gains in their currencies against the dollar,
they need a strong dollar versus their currency to keep Americans buying
their exports. This will not change, at least not on China’s part,
until that country’s economy is supported by internal consumption
rather than relying on exports.
America’s real problem isn’t foreign
held debt, although the US does owe almost a third of overall debt to foreign
states. China and Japan (the US’s third and fifth largest creditors)
together hold only 14.4% of US debt – American’s debt to themselves, approaching ten trillion dollars, is over
eight times the amount owed China.
China, at $1.16 trillion, is actually the third
largest individual creditor to the U.S., behind the Social Security Trust
Fund and the $2.67 trillion the government owes it - in second place is the
$1.63 trillion the Federal Reserve has recently purchased.
The budget shortfall, the deficit, for the first ten
months of 2011 already exceeds the $900 billion in discretionary savings
Congress agreed to find over the next decade in the just concluded debt deal
- the July deficit alone was $132 billion. Even the "super
committee" that is charged with lowering the deficit by $1.2 trillion
over ten years (above and beyond the $900 billion) is only going to come up
with one year’s worth of deficit spending savings and in total we are
talking much less than two years worth of deficit
spending out of ten, thats if such diverse
committee members can compromise in front of an election year.
The government’s deficit is now $1.103
trillion for fiscal year 2011, which has almost another two months to run
till Sept. 30.
Conclusion
According to the Bureau of Economic Analysis (BEA)
Medicare and Medicaid spending, in the second quarter of 2011, rose to a
combined annual rate of almost $992 billion. Medicare’s unfunded
liability alone amounts to $353,350 per U.S. household. Total entitlements
spending plus interest on the federal public debt account for about
two-thirds of the federal budget.
The largest problem in America is the massive debt
bomb called the Social Security Trust Fund and the $2.67 trillion the
government owes it. America’s population is aging,
78 million baby boomers are retiring over the next 15 years meaning massive
increases in federal transfer payments.
The biggest holders of US debt are Americans - the
majority of money Americans owe is owed to themselves. This self owed debt is going to continue to increase because
social benefit cupboards have been stripped bare, the monies have been
removed and spent, all that’s left are
IOU’s.
This is not simply a matter of today’s $2.67
trillion dollars, as serious as that number is, its
dwarfed by the hundreds of trillions of dollars America is committed to
spending on social benefits over the coming decades.
It would seem to this author, because foreigners own
less than a third of America’s debt, that Americans are not indebted to
the kindness of strangers after all, at least not yet.
Future Social Security obligations, the Federal Reserve and Ben
Bernanke secretly giving away $16 trillion dollars, pork barrel politics, more rounds of quantitative easing (QE3,4 etc) and US
Defense spending means huge budget deficits for years
to come. This has serious implications for the value of the US dollar and the
price of precious metals.
But there is more:
- US low
interest rates (a reality for at least two more years) and the high rate
of inflation are causing negative real yields for bond holders
- A
possibility of further credit downgrades
- Declining public confidence
- Global
debt crisis - European Central Bank (ECB) intervening in the bond
market, Bank of England to add stimulus, Japan and Switzerland are
intervening in their currency markets because of overvaluation concerns
The gold price today would have to be US$2358 to
match gold’s nominal high in 1980. The US dollar is a broken promise, people are going to continue to buy more gold and
silver. The seasonally strong period for gold and gold stocks is right around
the corner.
Mine production costs are dropping, with gold
trading around $1750 and silver at $38, gold and silver miners are going to
look pretty good to investors next quarter. Junior precious metal companies,
the owners of the worlds
next mines, are going to have their turn in the spotlight and should be on
every investors radar screen. Are they on yours?
If not, maybe they should be.
Richard Mills
Aheadoftheherd.com
If you're
interested in learning more about the junior resource market please come and
visit Richard at www.aheadoftheherd.com. Membership is free, no credit card or personal
information is asked for.
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