Saturday, December 11, 2010

The United States Deficit: Is the U.S. Too Big to Fail? (November 2010)

In November, the United States recorded a budget deficit of $150.394 billion, up just over $20 billion for the same month a year earlier and up $10 billion from the month of October 2010.  Here, from the Treasury Department, is a chart from the Monthly Treasury Statement for the month of November 2010 showing the monthly deficit situation for the past 14 months:

Note that the total deficit for the first two months of fiscal 2010 is $290.826 billion, down $5.79 billion or 1.9 percent from $296.65 billion for the first two months of fiscal 2009.  A statistical blip perhaps?

Let's put the $290.826 billion deficit for two months into perspective.  According to the World Bank, the deficit for the first two months alone is greater than the 2009 annual GDP for all but 30 nations in the world.  Among those that have lower GDPs are South Africa ($289.5 billion), Finland ($237.5 billion) and Hong Kong ($215.3 billion).  Don't forget, that the deficit of $290 billion is for the first two months of the fiscal year alone!  Here's a chart from the World Bank showing the 2009 GDP numbers for the top 50 nations in the world:

Let's put the $290.826 billion into terms that we can relate to.  As I posted earlier, it takes 232.56 one dollar bills to make a one inch thick stack.  For the first two months of fiscal 2010 alone, the Treasury has spent a pile of dollar bills that is 19,785 miles high more than what they've take in as revenue.  That distance would take us from Los Angeles to New York City and back four times.

Let's put the deficit into consumer terms.  At a list price of $499 for one of the much coveted Apple iPads, the $290.826 billion would have purchased nearly 583 million iPads, one for every American, Canadian, Japanese and U.K. resident on earth with 50 million to spare (excluding local taxes of course).  At a list price of $28,070 for a Toyota Prius V, the deficit for the first two months of 2010 would have purchased 10.36 million cars and given a real boost to Toyota's bottom line as an added benefit.  Not to mention Steve Jobs and Apple!

All this, and only two months have gone by.  Just think what we'll be able to buy after 12 months of mounting deficits!

The government has turned into the ultimate consumer and a deadbeat one at that.  How long will it be before the world's financial markets say enough is enough?  The fact that the United States dollar is the world's reserve currency and is deemed "too big to fail" has postponed its demise but, just like those of us who borrow to purchase our homes, our cars and other consumer goods, eventually the debt has to be paid or the bank forecloses.  

...and to think, a deal has just been reached that will cut taxes for the next two years and add another trillion dollars to the overall debt of the country.  Unfortunately, it seems to be easier to cut taxes than it is to slash spending and government waste.


  1. And my theory is, Europe and the rest of North America (along with some others) will get together with the U.S. and say "reset to zero". Having more than the one country do it at the same time will muddy things up such that it will be harder to value--or something.

  2. "The fact that the United States dollar is the world's reserve currency and is deemed "too big to fail" has postponed its demise but, just like those of us who borrow to purchase our homes, our cars and other consumer goods, eventually the debt has to be paid or the bank forecloses."

    This would be quite a problem if it were true, except for the part where it isn't. It's basic economics: the U.S. is never going to go bankrupt by running a deficit. We can simply refinance or raise taxes to cover the revenue.

    Additionally, based on your GDP figures, the United States has the largest economy in the world. Larger, stronger economic powers can naturally saddle larger deficits.

    I mean, running a deficit over and over is going to cause problems for the economy, but one of those problems is not going to be the U.S. going bankrupt.

  3. Really? But EVERYTHING has a breaking point, no? What in your estimation IS the breaking point for the USA?

  4. I agree, the USA is not going to go bankrupt. The reason is, all of its debts are in US dollars and it can print out as many of those dollars as it needs to inorder to repay those debts.
    The problem for you and I, is that the house for which we went into debt, is valued in Dollars, not the personal currency of Johnny or Suzy which would allow them to print their way out of debt.
    The problem for the USA is that its currency will become so ubiquitous, that it will lose its value to the point that the savings valued in those dollars will not be able to purchase anything truly of value, i.e. land, food, automobiles.
    We are already seeing the destruction of the middle class in North America, while at the same time seeing the evolution of the middle class in China and India.
    The other problem, is that we have such enormous entitlement programs and government military expenditures that create no value, that we must KEEP ON SPENDING in order to generate sufficient economic turnover to generate the tax revenues necessary to support that funding. Either we borrow individually, or we borrow through our goverment to support those programs until we cannot support it any longer.
    The way out of this morass is have balance in trade and currencies which are not manipulated. Until that is done, any other efforts will be window dressing on societal destruction.

  5. Anonymous said:
    Running a deficit over and over is going to cause problems for the economy, but one of those problems is not going to be the U.S. going bankrupt.
    Could you be a bit more specific about the problems you envision, assuming the deficit spending is continued?
    Would it be similar to what the last anonymous said?
    Don Levit

  6. If the dollar was not the world's clearing money, all the past money pressing (QE) would have already induced a marked devaluation.

    Beside this, inflation was kept in check at the beginning by the liquidity dearth following the credit crunch, and afterwards by the (engineered?) attacks on the euro zone debt, which weakened the only feasible competing money at the moment.

    Just look at the british pound to see the effects on a "normal" money: 20% devaluation right off the bat, and 5% inflation - increasing steadily.

    Because of the exceptional role of the dollar as clearing currency and home base of currency speculators, it is difficult to fathom if and how a demise would happen.

    10% yearly inflation for a decade would rid the US of roughly 65% its debt, punishing mostly China, the Saudis and the american citizens.

    But since this would possibly reintroduce stagflation, a shorter, more violent change might be engineered. The day W. Buffett diversifies, watch out.

  7. Anonymous:
    Thanks for your perspective.
    Is there any particular benchmark you have for "too much" accumulated debt in the U.S.?
    If so, why do you pick that particular benchmark?
    Don Levit

  8. This is scary.

    And don't tell me that us is not going to bankrupt. You just don't know when.

  9. Here is a relevant article I just read entitled "The U.S. Dollar: Too Big to Fail?"
    Don Levit

  10. Thanks Don. I check Financial Sense regularly - they have been contrarians for years and I like that.

  11. Don,

    Could you have possibly used percentages instead of raw numbers? I agree that the debt is a problem, though using raw numbers is misleading. Let's say this number is 20% of US GDP and Greece has a deficit of 200% of their GDP. Your comparison would always show the US much worse off.


  12. Steve:
    What percentages and raw numbers are you referring to?
    Don Levit

  13. Don, I think he means me.

    Yes Steve, I could have used percentages although it is surprising how the percentages vary with the source. While most economists use debt as a percentage of GDP as a measure of indebtedness, I tend to like debt per capita. I'm by no means an economist (although, unlike economists, I could see the housing collapse because all it took to foresee that debacle was a bit of common sense) but debt to GDP varies hugely with changes to GDP. As GDP shrinks, the ratio goes up and vice versa but it seems that no matter how high GDP goes, governments use the growth in the economy to take out more debt rather than service what they already have on the books. As an individual, I can relate more easily to per capita debt; when I see a number like $45,000, I know that my share of the debt is a whole pile of money! I did an earlier posting on just that on November 23rd.

    Thanks for your input.

  14. Problem is "Does the USA count debt held by the Fed as federal debt"? About a third of all debt of the federal government is to federal agencies and the Fed.

    Since most people don't count this debt, they assume that financially the USA is comparatively sound. (as sound as Germany, Austria, Australia, the Netherlands, etc) However, the government (or the people) doesn't own the Fed, Wall Street does. So these debts to agencies are real debts and the USA is in the same position as the UK, with the advantage that foreigners hold most of its money outside the country.

    This advantage becomes a disadvantage when foreigners loose their faith in the USA. It is my personal opinion that when the world looses faith in the US federal government and the US$, it will happen as a cataclysmic event. The US$ will then loose a lot of value (30% - 70%) as all foreign holders will liquidate their US$ exposure. All dollars will flow back into the USA, leading to enormous inflation. The USA would be lucky if another asset bubble (housing, general equity, some new tech like the dotcoms) soaks up all that cash. Even so, a new bubble would lead to mass investment in bad prospects. It could all happen tomorrow, or in five or one hundred years.

    That is why, in my opinion, the USA should try hard to balance the budget and the balance of trade.

    I.e. the government can and does spend profligately, the Fed makes ever more money, and it disappears into old socks and matrasses in Africa and into central banks and sovereign wealth funds in Asia and the Middle East.

    If and when China stops buying T-bonds, or more countries than just Venezuela and Iran start selling their oil in EUR, the dollar declines. For the Chinese government, the USA is too big to fail, so it will for some time act as buyer of last resort, together with the Fed.

  15. sorry, must have copy pasted last two paragraphs to the end. Those should have remained behind: "foreigners hold most of its money outside the country"

  16. You are right about a third of all debt is to federal agencies, which is known as intragovernmental holdings.
    To my knowledge, this does not include the fed, but only trust funds, of which Social Security and Medicare comprise about half.
    Many economists discount this debt, for it is debt the government owes itself. It is debt the Treasury owes the various trust funds, for it is money the Treasury borrowed to pay current expenses, and keep the deficits lower, to boot.
    The trust funds and the Treasury are subsets of the set, the federal government. How serious would you be about paying debt back that you borrowed from yourself?
    It is also inferior to debt held by the public for 2 other reasons. First, debt held by the public pays its interest in cash, out of the current budget.
    Interest "paid" on intragovernmental holdings debt is done by issuing additional Treasury securities, more debt, so there is no present effect on the current budget.
    Also, the federal government itself considers intragovernmental holdings debt as Level 4 debt, the weakest of government commitments.
    Debt held by the public is Level 1 debt, the strongest commitment the government has to the debtholders.
    I can provide objective governmental links to support my statements for anyone who is interested.
    Don Levit