Guest Post: The US Debt Crisis - How High Will It Go?

Tyler Durden's picture

Authored by Chris Ferreira, originally posted at Economic Reason blog,

The implications of the US debt crisis are not well understood in most circles, and it is not widely spoken about in the media and during important political debates. The irony is that the US debt is so significant that it plays a monumental role in finance and modern political strategy. The debt poses great risks moving forward, and yet it is referred to in only the vaguest of terms.

Here is why the US debt must grow every year and why it is mathematically impossible for it to continue forever.

Before we can understand why the debt must grow every year, here is is a visual representation, to scale, of how much the current debt is standing at. Each tall uniform column in the background of the picture below refers to a pile of $100 bills stacked one on top of another. Each “tower of debt” consists of 10 x 10 fork-lift palettes that reach out into the sky and are higher than the old World Trade Center buildings. These towers of debt represent $US 16.394 trillion. However, by the time you wake up to read this, it will be larger than that. DemonOcracy does great work on visual representation of the US debt levels. 

Why did the US debt grow to these proportions?

Short answer: the US government spends more than what it receives in revenue. In 2012, the US federal government expects to receive $2.5 trillion in revenue, while the total spending carried out by the federal government is $3.8 trillion. The difference ($1.3 trillion) is debt piled onto of the previous debt.

To put $1.3 trillion into context, it is approximately $3,56 billion a day. To make matters worse, the current debt does not take into consideration federal obligations such as social security, Medicare, pension, and retiree health promises. According to David Walker, former controller of the US, when these unfunded programs are added to the enormous debt, it stands at $70 trillion and growing–that is $10 million per minute!

Seventy trillion dollars is over four times the debt in the picture on your left, dwarfing the current US GDP; in fact, it is approximately the world’s annual GDP in 2011. For a current view of the US debt, see the debt clock here.

The government allows for the debt to continue to grow by adding new debt on top of old debt plus compounded interest. Instead of paying back the debt, the government just borrows more to cover previous interest. The interest payments on the debt is over $1 billion a day. When “Uncle Sam” takes out a loan, it is called a bond (I.O.U.). These bonds are purchased by investors, banks, and foreigners. These bonds are a promise to pay capital plus interest. What “Uncle Sam” does, essentially, is pay his investors with his credit card and create new loans to cover interest.

Talk about short-sighted finances with no discipline.

Compounded interest has allowed the debt to grow exponentially, and has reached, in my opinion, unsustainable levels where the debt is reaching at the vertical portion of the “hockey stick” formation.



Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.

- Albert Einstein

How does the US government allow the US debt to grow?

Doing the “right thing” is usually political suicide for politicians. Cutting expenditure to pay its bills to pay down the debt will make the economy implode. Instead, the government in power continues its daily activities and promotes new social programs to promote reelection. Almost half of the spending done by the US government goes to entitlements (Medicare, Medicaid, social security). If any cuts are carried out in this sector, you can expect riots on the street (approximately 28% of the US population are baby boomers and 80% of investments and laws are carried out by this powerful demographic.) Cuts to entitlements are highly unlikely!



The continuous debate on raising the debt ceiling is all about a government mismanaging its money and not being able to control it–much like a child with no discipline. Since debt is being mismanaged, it has caused many distortions in the markets, and yet the debt is allowed to grow because of the US Congress. The debt ceiling has been increased 10 times since 2001. If the debt ceiling were actually a ceiling, the market and debt distortions would have imploded the economy–an implosion necessary for the economy to restore its equilibrium and liquidate all inefficiencies.

“Too big too fail” is absolute nonsense.

Paying back investors, costly wars, entitlements and bailing out the “financial terrorists” (who caused the crisis) all add to the national debt and to the dysfunctional economy that continues to operate until its debt will cease to grow. The problem with this system is that it created significantly more credit (someone is the creditor to all the debt) than “cash” money (money in your wallet). Every time debt expands, the credit supply also expands. (Read Fractional Reserve Lending on how money is created.)

According to the FED, the Total Credit Market Debt Owed (TCMDO) is approximately 53$ trillion and 2.4$ trillion in the true money supply (M1). In other words, cash money is approximately 4.5% of credit (TCMDO/M1).

The result to our economy is that “boom” periods are hardly driven by cash money, as cash money is insignificant in relation to credit. Credit is what drives the markets, and it is this same credit that “busts” the markets as well, in times of credit contraction. In order for debt to expand, someone must be lending the US this money. At the moment, the lenders are China, Japan, and the OPEC countries. 

But why do they continue to buy this debt?

Because they have too.

The US Dollar is the reserve currency of the world. You need it to buy oil, a vital component of any economy. Since other countries like China cannot print US dollars at their leisure, they have to get it from somewhere. They get it from trade with the US. The US buys products in Asia and the rest of the world with US dollars, and in turn these same dollar surpluses are used to buy oil and US bonds, creating a much needed artificial demand for US dollars.

This is also how the enormous US 558$ billion trade deficit in 2011 was financed. The US has been in a trade deficit since the 1980′s and it continues the grow as jobs and manufacturing are being lost to more competitive nations. The trade deficit also accounts for the national debt. The financing of the debt creates artificial demand for US bonds which helps lower the interest rate and coincidentally helps to raise the debt levels even higher.

The table below shows the leading foreign holders of US debt, which are China and Japan, followed by the OPEC countries. These are the main financiers of the US trade deficit.


But here is the Achilles’s heel for the US debt scheme:

In order to maintain and continually expand the debt, the US dollar needs to remain the reserve currency. In order for there to be continuous demand for these dollars and debt instruments, the US dollar needs to maintain a hegemony over competing currencies. Any threat to the dollar needs to corrected immediately. or else confidence in the US dollar will be quickly eroded and the subsequent tsunami of US dollars abroad rushing into the US will cause hyperinflation as never seen before.

William R. Clark’s excellent book, Petrodollar Warfare, treats this issue precisely, going in depth into the Petrodollar collapse and how the US maintains its dollar supremacy with its current imperialistic foreign policy. This gem of a book is a definite read for anyone wanting to know how the US truly maintains its power on the world stage.

Undoubtedly, the extent of US debt would never have been possible had the US dollar not been the reserve currency and had there been less favourable global trade policies to provide a channel for the distribution of dollars. (You can also read more about the Petrodollar here.)

Why must the debt grow every year?

To keep the debt-servitude paradigm going. To increase economic activity in a country operating in this type of system, you need to increase the level of credit and thus debt grows in tandem. This is self serving: if debt is the “fuel” to increase economic activity, interest payments will become larger and larger, until eventually it reaches a point where debt can no longer be increased. This point is known as the Minsky moment–when there is no net benefit to extra debt.

Adding debt, both public and private, creates an environment of servitude among the population while the banks are generating extra profits. Through their lobbyist groups, the financial terrorists create favourable laws to keep people enslaved with debt.

Real estate, for instance, is a heavily subsidized investment; such subsidies entice people to purchase real estate and as a result, people are unwittingly working for the banks. In a real free market, people save money for a purchase.

The word “save” is becoming archaic in this debt servitude paradigm, a paradigm that was build on sand and cards and that can and will eventually collapse. The foundation, of course, is confidence in the US dollar.

So there we have it, in our “creditopia” world, if debt does not expand, the economy cannot grow and jobs cannot be created. In order to increase debt, foreigners have to continually finance the ever growing debt by purchasing government bonds and selling consumer products to the US. In turn, the US must increase the level of consumption, decrease savings, and eliminate the threat of any nation posing a risk to the US dollar hegemony. Is this a symbiotic or a parasitic relationship? Is is certainly a relationship that cannot grow forever. It poses an economic risk for ALL nations due to the interconnectedness of the global economy.

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CompassionateFascist's picture

Including debt parked at the mortgage agencies, REAL U.S. govt debt is already >$22 Trillion. And the main financier isn't China/Japan/OPEC anymore. It's the Rothschild family, alias the "Federal Reserve". I cannot imagine a deadlier situation. Neither can they. That's why the gun-grab. 

Joe moneybags's picture

That post was a waste of bold and italics.

Ralph Spoilsport's picture

You should demand a refund toot sweet (that's French!)

francis_sawyer's picture

The time to see the dentist is 2:30... (That's Chinese)

Ralph Spoilsport's picture

Alas, Chinese dentalism is a bridge too far and less filling.

Tom Green Swedish's picture

Entitlements aren't so bad as long as we use them like they did in the past.  That means living with your mommy and daddy or them living with you.

GMadScientist's picture

"In the past", we put people who couldn't work anymore on ice floes or packed them away in an opium den.

Now we pay for their boner pills and heart meds while they play shuffleboard into oblivion over much time at great expense.

I say we take America's penchant for reality TV and make SS a competition...

"Two old men old man leaves...with a check."

Just Ice's picture

Medicaid, Medicare and Obamacare are corporate welfare...for the pharmaceutical companies, insurance carriers, doctors consortiums, hospitals and other so called health care providers.  The vast majority of elderly would be better off with a direct fixed payment annually as a health care subsidy and responsible for purchasing and providing their own health care or, if they chose, health insurance/HMO membership.

That approach would also save taxpayers a lot of money.  No billings for 20 expensive procedures that didn't take place, no 15 different prescriptions because its a medicare patient and "the government can afford it", no twice a month doctor visits for the sheer sake of bill padding.  On the other hand, those seniors whose basic health needs consist of nutrition, exercise, prescription lenses and hearing aids, would have the health care dollars to pay for those items, none of which are paid by Medicare.   

philipat's picture

China is simply biding its time to launch a Gold-backed RMB. At that time, the choice will be easier. Petro-Dollars anyone?

Skateboarder's picture

He who has PMs can convert his wealth into whatever other medium he wants, at any given time. Today's real money might be tomorrow's monopoly money. Beware of paper...

Tom Green Swedish's picture

Pray we turn into Saudi America Texas again.

GMadScientist's picture

You must have missed their proposal to make SDRs the reserve currency after adding the RMB to the basket.


philipat's picture

That was over five years ago and was rejected by The US for fairly obvious reasons. China will, therefore, go it alone.

John_Coltrane's picture

They better not wait too long with 1.3 B people they won't be able to feed and an excess of males to females (a sort of human time bomb the longer they don't get laid)  China is not the future-its just in better shape than India or Bangladesh.

Just Ice's picture

They also face the same problem of an aging demographic as Japan and most of the West do; iow, a lot more elderly in need of support by a lot fewer young.

blindman's picture

everyone knows that facts mean nothing.
it is context that is king and facts are
pawns in the kingdom. meaning and value
refer and defer to the context, king.
you are not dealing with the open human
mind but a synthetic creation of debt money
consciousness. a half wit.
granted this is the phd level shit but
it does happen to be true. you cannot
argue facts in contradiction to the context,
that is just dismissed as trivial or irrelevant,
outlier, one off bullshit. it is the context
that must be destroyed as inept, the jugular.
corot that artery sir.

Yen Cross's picture

That was an amazing " Info Graphic" Tyler! You kick ass.  

 It's amazing how well you [scale} spending into pictures. I filed that little beauty in my favorites.

Landrew's picture

Remember it was a GUEST post! Give credit  (if any is due) to whom created it.

Surrealist's picture

This debt bubble has to burst some time surely?

Harbanger's picture

When interest rates start rising.  It will collapse when the world realizes they will NEVER be paid back and therefore no longer buys American debt.

Yen Cross's picture

The (Fed.) thinks they can use reverse repos, as opposed to outright "money supply" contraction. We all just saw what happened to yields on a "whiff" of tightening.

 Break out the ' Methadone' Bitchez/

Harbanger's picture

With reverse repos, aren't they just buying securities to monetize the Banks.  I think the only tool they have is different schemes of printing until they finally destroy the currency, and they know it but won't say it.

Yen Cross's picture

Are we lost in translation? The Fed. will use (short term) monetary policy to pull liquidity from the system.

 ECB style/ They will fail, as all the short term paper has been twisted!

Harbanger's picture

Ok I get it, like the ECB.  Of course they will fail.  I thought you meant Fed adding reserves to Banking system with a repurchase agreement like they did in 2009.

Yen Cross's picture

 No, you don't get it. The Fed. has been twisting "inflation" for 4 years. If the Fed. decides to start selling paper, no sovereign on Planet Earth will settle for 10 basis points.

  This isn't about U and Me. When those short term bonds hit the market ( KABOOM)  Greece is a dot on your screen.

  People will unwind to be liquid. The $ will spike (short term) Yields wil skyrocket, and the " Fractional Reserve" concept  will hang some politicians and bankers.

Harbanger's picture

You're right, no one will want to buy our bonds with 10 basis points.  The increase in yields will then collapse the system.  I think I get it.  I believe all that wealth is going to end up going into commodities.  Do you agree?

GMadScientist's picture

Like undoing a very necessary girdle in a public place...fuuugggly.

And they can't even agree on when to stop making it worse.

Some things you can only sterilize by nuking from orbit.

bobert's picture

"Twisting" by the Federal Reserve moves short and long term treasury rates in opposite directions. The central bank is selling one end of the curve and buying the other.

In lieu of the above when they start selling treasuries back to their primary dealers (20 international banks) the money supply will contract and the economy slow.

On the other hand if the federal reserve wants the economy to expand then it purchases treasuries from it's primary dealers who are then flush with cash to loan to the public and the economy expands. This is what they have been doing since 2007. it isn't working very good. Beause the banks made poor investments in recent years they prefer to take little or no risk by holding cash in reserve at the federal reserve and be paid near zero interest. They are following Warren Buffet's first rule of inves ting, "don't lose money." Besides that smart business men and consumers are not borrowing from the banks due to the perceived future of risk.

So monetary stimulus is kind of broken, and hence all that is left is fiscal stimulus.

Your question is a good one.

CompassionateFascist's picture

Negative, see above. And I doubt the primacy of economics. When Civil War II  begins - and, via the gun-grab, we are getting close - the debt-Ponziconomy will collapse w/in days. 

Harbanger's picture

Collapse within days?  That may be a little optimistic.  I'm a pessimist so I'll give it a couple of more years.

nmewn's picture

lol...not a problem...just stamp out a platinum coin saying its value is ONE QUADRILLION DOLLARS.

Instant surplus!

Next!!! ;-)

Yen Cross's picture

  Ameri >l a ™ Backwards k's aren't allowed?

blindman's picture

sometimes i wonder if i have lost my mind
when shit just gets funnier as the horror of
the situation becomes more obvious and worse.
if you haven't seen it ....
or watch it again.
George Carlin - advertising and bull shit
this is comedy. the other thing , "reality",
is tragedy wrapped in bad and fraudulent
your post made me laugh too.

Beam Me Up Scotty's picture

The whole platinum coin thing makes me laugh.  Yes, why stop at a trillion, when you can make it a quadrillion?  Hell, the government shouldnt have to levy ONE THIN DIME of taxes anymore, right?  They will have all the money they need to fund their shit and then some.  And think of how great that would be for the economy if NO ONE had to pay ANY TAXES anymore?  No income taxes, no property taxes, no sales taxes.  No LIQUOR taxes!!  Everyone could go on a spending spree like we've never seen in the history of the world.  Talk about fiscal stimulus!!  Lets do it!!

Dr. Sandi's picture

I believe the quadrillion dollar coin is called the Quatloo.

unrulian's picture

is that what is was called in Zimbabwe?

francis_sawyer's picture

No... It's called the "jooZOOKA"...

traderjoe's picture

Why should anyone pay taxes? Why shouldn't the US Treasury simply print United States Notes - the longest running currency in our nation's history?

Taxes are theft from the barrel of a gun.

Privately created debt money (the FRN) is the scam of the Century.

Can we create something from nothing? No. But at least it would be the People's Currency.

bulldung's picture

I have long wondered why not give a very large tax break as deficits don't matter to politicians nor economists. It would certainly stimulate my economy.

Publicus's picture

They do this kind of things, in China for example. :) All those bad debt at state banks? Let's modify a few computer files, there, all fixed.

Element's picture

Egad! ... can we buy a star fleet and piss-off before reality notices?

GMadScientist's picture

We had one but some jackass screwed up the metric conversion and at those speeds it really makes a difference; they're parked just past Zeta Reticuli.

Tango in the Blight's picture

I have ONE QUADRILLION DOLLARS. The thing is they are Zimbabwe dollars, ten notes of 100 TRILLION ZIM$.

But soon I'll be getting my hands on a ONE QUADRILLION DOLLAR US$ note.

And it will be worth the same as my ZIM$ notes: nothing.

Banksters's picture

As high as Barack Isuckoffbankers Obama says it will?


And I quote.


“If Congress refuses to give the United States the ability to pay its bills on time, the consequences for the entire global economy could be catastrophic,” he said.

"I will not compromise over ... whether or not Congress should pay the tab for a bill they’ve already racked up," Mr. Obama said in his taped weekly address,




nmewn's picture

Barack-Insane-Obama could veto ANY bill sent to his desk...he has chosen not to.

Lets throw another log on the fire...

( – House Minority Leader Nancy Pelosi (D-lol-Calif.) said Friday that she would raise the debt limit unilaterally “in a second” if she were president of the United States.


Pelosi and other Democrats have suggested that the president could bypass Congress and unilaterally raise the debt ceiling by invoking the 14th Amendment of the Constitution, which states, “The validity of the public debt of the United States…shall not be questioned.”

Yes, of course, by stating something, that actually makes it so.

So when I say I mailed my check through the US government Postal Pervice its as good as gold and in the hands of the IRS! 

Its all good, as long as we understand each other Nana ;-)

GMadScientist's picture

I can't help but notice this little section of that amendment (yeah, it was about not financing one's own reparations from the rebels, but work with me):

"But neither the United States nor any State shall assume or pay any debt or obligation incurred in aid of insurrection or rebellion against the United States, or any claim for the loss or emancipation of any slave; but all such debts, obligations and claims shall be held illegal and void."

Reneg on the basis that the debt was incurred while performing an insurrection on the US! DC has rebelled!!

ZeroAvatar's picture

When the time comes, the US will OUTRIGHT DEFAULT. 


What better way to get a 'fresh start' than to 'file bankruptcy'.


Don't like it?   Tell it to the F-35.

nmewn's picture


That is the sovereign financial game being played, as always. The other side of that is patriotism, the issue (or trick) for all humanity, is to stand pat on our individual rights everyone is born with.