Thursday, January 8, 2009

Drowning in Debt

You hear the term "drowning in debt" used a lot in regards to American consumers. The credit card is king. Just listen to the radio or watch TV for a short time and you'll be inundated with credit help offers. "Erase your debt!", "Consolidate those cards!", every few minutes another company offers you their services to make that debt prison you're in go away.

It's not just credit cards - it's 6 or even 7 year car loans, it's mortgages, it's losing your job. What many don't grasp, however, is that this statement is also true of our government. You see, as a nation, our Gov has been spending far more than it makes for some time now. That money has to come from somewhere, and in order to avoid large amounts of crippling inflation, that money in large part comes from foreign nations, such as China.

That money funds all those Federal entitlement programs, the military, the national road infrastructure, everything really. Unfortunately, we have had a group running this country for some time now that hasn't really paid much attention to making sure that the innies meet or exceed the outies - that is, income is less than or equal to spending.

So the country is entering a debt prison. At the moment, that number stands at somewhere around $10.6 trillion (with a T). Our gross domestic product, the measurement of all spending and production in the country (which includes, by the way, spending by the government) is around $13 trillion. That number, however, is just what was produced - not the amount that came into the government. While there are other sources of income, Federal Income tax for 2006 was only $2 trillion. That's an awful big spread.

Why is this important? The current ability for our government to pay for its programs, its military, again, everything is hinged on continuing to receive money from foreign investment. And now this:

U.S. debt is losing its appeal in China

Sure, there are other sources of income, but this may be the start of a trend. You do not continue to fund a company, or in this case a nation, past the point that they can not pay it back. You also can not give money to someone if you need it to keep yourself solvent and alive.

How long will it be before foreign nations decide they'd rather see the money they've already invested come back before they give us any more? What will this do to you and your job? What are you doing to minimize your risk? Further, what happens when your nation's economy hits the tank and you need the money you'd otherwise be investing in US Treasuries to keep your own people fed and happy? Those funds dry right up.

A great writeup from Denninger is available here. Definitely required reading. The red line he references now links to the link I've provided above.

For a nice thought exercise, check out the list and valuation of foreign holders of treasury bonds - essentially our nation's credit card debt. How many on that list are unfriendly to our freedom and policies? What do you think might happen if we become unable to repay them?

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