And boy, what a pickle this is. It’s not that fantastic jar of pickles that your grandma home-canned last summer. This is that big fat monster that they package in that creepy bloated bag and try to sell at places like Blockbuster and stinky bathroom quick stops.

What is our current debt?

As of 5/21/11:

Public Debt = $9.716 Trillion

Intergovernmental holdings = $4.629 Trillion

=$14.345 trillion total public debt outstanding

According to the federal schedule of debt, the publicly owned debt amount was $9 Trillion as of September 30, 2010, and the intergovernmental holdings were $4.5 for that same period. For April 30 of this year, those same numbers were $9.6 trillion and $4.6 trillion. Let’s see… so that’s a $600 billion total publicly held debt increase in a mere 7 months? Calm down Janeen! Stop hyperventilating. You haven’t got to the bottom of this yet, so don’t freak out… 

The current debt subject to limit:

What is the Debt Ceiling?

According to this CNN Money article, the lawful amount that the government currently can be indebted is set at $14.29 Trillion. Current obligations will push the amount of debt past that point, thus the argument about whether or not the ceiling should be raised. The debt ceiling has been raised 74 times since 1962. The US Treasury estimates that the current debt ceiling will be reached by May 16th (although the Secretary of the Treasury, Timothy Geigner has said that through some accounting magic he can extend that date by 10 weeks). On May 16th, Geithner sent out a letter detailing the beginning of this measure to create “headroom”, while simultaneously begging for a debt limit increase.

Economic Indicators

  • US Dollar index

The dollar index (USDX), according to Wikipedia, is a measure of the buying power (value) of the dollar against 6 other currencies (the Euro, Yen, Pound sterling, canadian dollar, swedish krona, and swiss franc). The dollar index increases as the US dollar rises in strength compared to the other currencies. The current index high occurred in 1985 at 148.1244, and the record low for the index took place on March 16th, 2008, at 70.698.

You can see from this graph at that the dollar index has been declining steadily over the past year, with a low of just under 73 in early May. Since that time, the dollar has risen in strength. Why? I have no clue. Has the dollar actually gained in relative purchasing power, or is it a temporary shift due to <insert brainy economic term here>? Perhaps, as with U.S. securities, investors are seeing the dollar as weak, but stronger than its competitor currencies?

Why track this index?

Rumor has it that a drop below a certain point (72? 71? 70?) would signal a lack of confidence in the dollar, and subsequent actions (rise in interest rates, loss of US dollar as reserve currency, widespread inflation). Don’t freak out, it’s just a theory.

  • Long term treasury securities (an indicator of how investors feel about the future ability of the government to pay back on its obligations)

As investor confidence wanes, the Treasury must offer a higher rate of return in order to entice investors into purchasing their product. Reversely, a strong confidence in the product would lull investors into accepting a lower rate of return (yield). So, you’d expect record highs on treasury securities right now, correct? Only if our economy weren’t global 🙂 Right now T-Bill rates are at their historical lowest, as investors choose US securities over their European counterparts. Apparently Europe is having its own crisis right now. Well, who knew? Yes, I’m a bit slow. You mean, the bills issued by our own $14.2 trillion in debt government are more attractive than securities offered by European countries? Wow, they must really be in trouble. The good news is that investors don’t seem to think the U.S. is in any immediate danger of drastic inflation. They’re still willing to park their cash here, and that’s good for us.

Take a look here at the daily treasury yields for this year so far. Although the 30 year yield has just barely inched down, even the 10 and 20 year securities have dropped significantly. Very interesting.

  • Debt to GDP ratio

According to Investopedia, the GDP (Gross Domestic Product) is the measure of value of a country’s goods and services production. The GDP is commonly referred to as a measure of the size of the economy. It’s calculated by either adding up what everyone spent, or adding up what everyone earned.

The Debt to GDP ratio is just that, the comparison of a country’s indebtedness to its production. Said another way, it’s the size of our debt, compared to the size of our economy. The Debt to GDP ratio gives an interesting picture of how much discretionary income we have as a country. As the ratio nears 100%, we will find that the national debt is consuming all of the U.S.’s production. Freaky, huh?

The current ratio is hovering at 90%.

Just what have we been “buying” that has necessitated this debt?

As I covered in the last post, the top 6 spending categories for the 2011 budget are as follows (numbers taken from the Death and Taxes poster):

  1. D of D/National Security              – $895 billion
  2. Medicare & Medicaid                     – $788 billion combined
  3. Social Security Administration   – $730 billion
  4. Income Security                               – $580 billion
  5. National security discretionary   – $520 billion
  6. National Debt Interest                   – $251 billion

To cover this spending, the government will receive $2.567 trillion (just under half of which is receipts from income taxes). 

Assuming, for a moment, that taxes aren’t raised to help finance the debt, you can see that it is going to take more than a few cuts here and there to balance the budget, much less begin to reduce our debt. Our deficit for this year alone is 1.26 trillion dollars. Just looking at the numbers above, a balanced budget could be achieved merely by canceling the entire Department of Defense, and half of the discretionary National Security budget. Whoa. Or, a balanced budget could be achieved by cutting the Department of Defense budget in half, and completely eliminating medicare and medicaid. Or, if you’d prefer, we could balance the budget by completely eliminating social security and income security spending.  Well, look at these great options! This ought to be no problem for lawmakers! <<insert sarcasm>>

Who Holds the debt?

according to Farm and Dairy News (ha ha) and the US Treasury, the majority of the national debt is split between the government itself (through various funds, including social security), and domestic private investors. The amount of our debt held by foreign interests accounts for 4 of the 14 trillion dollars.

What’s happening in the government on this issue right now? 

I can see how lawmakers are having a difficult time agreeing on a debt reduction plan. Even here at Maxwell House we’ve had a memorable heated debate on the topic. I advocated a reduction in defense spending and the gradual elimination of social security. Hubby balked at the idea of defense decreases. Must be the protector in him 😉

Current proposals include:

  • The Ryan Plan (titled “The Path to Prosperity”), was developed by house budget committee chairman Paul Ryan (Wisconsin) and fellow house committee members. See a synopsis at the Wall Street Journal, or at the budget committee site. This plan is, in a nutshell, based on various spending cuts which are expected to allow the budget to slowly become balanced (in 2015!), and then pay off many debts… by 2050!!

I’m no political expert, but I do know that politics change at the drop of a hat (or ballot), and budgets transform mysteriously from year to year regardless of previous promises and legislation. The only thing constant in politics is change 🙂 I’d be surprised if this plan were even able to meet its goal of balancing the budget by 2015, much less its long term goal of debt reduction. All it takes is one “crises” for the elected to throw out the old rules and spend us back into oblivion. However, it appears to be a well thought out plan, and perhaps the best available. Let’s examine some more proposals.

  • The President’s Proposal aims to eliminate the deficit within the next 10 years (note: we’ll still be going farther into debt until that time), with a combination that includes 2/3 of the reduction due to spending cuts (mostly through a discretionary spending freeze?) and 1/3 of the reduction due to an increase in taxes. I tried to read this overview with an open mind, I really did. I can’t help but feel that the man who drafted this thinks so very differently from myself and my family. Though the plan touted spending cuts, most of the wording from this overview indicates that somehow more money is going to be spent in many sectors, including education and welfare reform, and a commitment to increasing “clean energy”. Ummmm???
  • Current budget talks are in session between the administration (represented in part by Biden and Geithner) and Rebublicans (represented by Cantor, Kyl, Inouye, et al). Kyl has said that there is an agreement about $150 billion in cuts, but both sides are far from a final agreement. Oh dear. According to the death and taxes poster, this year’s budget deficit rests at $1.267 trillion. So, if we trim even twice the currently agreed upon amount ($300 billion), we’ll knock the yearly deficit down to just shy of $1 trillion. Alright! That’s real progress! <<insert sarcasm>>
Stay tuned for part 3 of the Debt Crisis series; “The Future”. After part two I’m not sure whether to be happy (look, we’re doing better than lots of Europe!) or sad (a budget agreement is a long way off, and likely won’t address the crisis in a powerful way).