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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AgAu_man's picture

F-35s? In that case, better long Lockheed, long COL.

Drones? Better long Boeing, long COL.

Too 'actionable'? Sorry, please continue with clever quips.

GMadScientist's picture

What's that? Can't find anyone to fly your F-35s? They expect to be paid in what?!

DosZap's picture

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,

How about rewording that Mr. Obamao?, For a Bill YOU have already racked up, and JUST added another 4.4 TRILLION TO?.

Hypocitical bastard.

Seasmoke's picture

i think we have our answer to WAR, WHAT IS IT GOOD FOR ???

BurningFuld's picture

Be smart China don't get baited into a stupid conflict...think small island somewhere.

TotalCarp's picture

Bang on (pun intended). USD reserve status and ridiculous military superiority (read military spending - which is exactly what debt is needed for) is the key way of staving off the collapse. Its all very closely interelated really one big fucking catch22.

You see all the pronouncements of "end game" are correct in as far as we can never go back to a sensible economy without a 100% reset. They are wrong tho in as far as prediction of the impending doom. This shit can go on for years

CompassionateFascist's picture

Nope. Like I said last year: O's inaug, then 60 days to Ft. Sumter.   

TotalCarp's picture

We shall see. I suspect you are wrong as "they" are not going to force the issue and the status quo can be qe-maintained for a while longer. But if you are right i wont cry either, i have long ran off from Amerikka and i am not important enuff to be hunted with a drone

francis_sawyer's picture

 "You stupid good lookings... I'm too important to be captured"


Madame Yes

TotalCarp's picture

Brilliant clip, cheers dude

GMadScientist's picture



loveyajimbo's picture

When it all ends... just watch Obunga... an exec order ot two forgiving all debt, seizing all American assets, marshall law, suspension of what is left of our Constitution... which will lead to armed revolt... it will get ugly and fast... and HE is the craven socialist muslim tool that will start the BIG party.

HurricaneSeason's picture

All resources will be nationalized. Jobs will finally come back.  The government will control every wage rate and every business, but hell that's not that much different than now. Communities will be more like military bases or fema camps.

Beam Me Up Scotty's picture

Is it a job when you are being forced to work?

espirit's picture

This is hell.

BANANAAA+  (borrowed from another ZH'er)

Lucius Cornelius Sulla's picture

In the USSR's end days the joke was,  "So long as the bosses pretend to pay us, we will pretend to work." 

Anusocracy's picture

Putin asked why we were going towards where they were coming from. The answer is simple: we have the same type of leaders they had.

Government is to blame for our problems, and they're guaranteed to get worse.

XitSam's picture

What will people do if the gooberment turns off the electicity or gas in winter because the community didn't meet its bureaucrat assigned production quota?  Or because a prohibited gun was found in a house?  Or doesn't put any value on your EBT card because you criticized the Great Leader or because you didn't show up to a "Worker's Protest"? What will happen when your kid tells the teacher that rights are not granted by the government?

francis_sawyer's picture

You'll get to fight Katniss Everdeen in the next Hunger Games episode... Or go against 'Sub Zero' in the next Running Man...

Dr. Sandi's picture

You've heard of him.

"Mayor, crime here in Dodge is gettin' outta control."

Sucking hard on his bong, the mayor looks up. "Better get a telegram off to the governor and have him send us Marshall Law.

Oh, and if he's busy, tell him we'll settle for Marshall Dillon."

GMadScientist's picture

I thought Marshall Law was where you punish people using amplifiers.

Ralph Spoilsport's picture

Before that Vox Populi was very punishing.

ZeroAvatar's picture

The US will be no different than Syria is today, killing its citizens. 


Ghadaffy did it while he could.  Egypt was ready to, but the muzzies pulled back first.


Bahrain, in the process.  We're all just terrorists to our faithful, loving, caring gubmint.


And they WILL kill us.  I don't know how we plan to fight back against jet fighters, tanks and drones.


I'm sure someone is drawing up plans somewhere, though.

seek's picture

The US has more than four times the population of Afghanistan and Iraq combined, and more than seven times the land area, with a firearm for every person in the country.

With nearly the full support of the US, we haven't succeeded in Afghanistan, and if the military we deployed within the US, there would be anything but support.

Presumably it'd take some TSA-esq organization, and it would fail at epic levels. If they simply wanted to kill the population off, presumably they could go chemical/biological, but that cuts both ways, and more critically, eliminates the labor base, and would likely trigger an complete breakdown of the chain of command.

Latern Spike, REX84, and Garden Plot are examples of the plans they've drawn up. I seriously wouldn't count on any "plan" working -- after the first 10,000 or so people get disappeared, any pretext of restraint would disappear when someone showed up at your door looking for you. The old adage of "no plan survives contact with the enemy" would apply the moment the civilian population of the US was declare the "enemy" the second time around.

Shell Game's picture

Good post, Seek, 100% agree. Recently read a book by John Robb called 'Brave New War' that lays out the forth generational warfare reality confronting aggressive/oppressive, globalized nation-states.  Great read.  

GMadScientist's picture

Shut up you fuckin' much of that debt was accrued by your fuckin' hero, dumbass?


DosZap's picture


Well may not be an armed uprising as he is coming after anything capable of monting an offense.

Time for Secession


HERE HE COMES...........................................AFTER the 2nd TOTALLY.

LIAR and a HYPOCRITE, as we all knew it.

JustObserving's picture

 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!

According to Kotlikoff, US unfunded liabilities are $222 trillion and growing at $20.9 million a minute.

Banksters's picture

The game is over.    That is why the fuckers at the unfederal reserve and the white house NEVER offer ABSOLUTE equations for the type of growth that will get us out of this mess.

The only solution is revolution, along with a big dash of FUCK YOU I'M NOT PAYING THE BILL FOR LYING COCKSUCKING POLITICIANS.


Professor Fate's picture

No Big Deal!  That's only 70 new Trillion Dollar Platinum coins with a picture of Obama on one side and Michelle's butt on the other.  Everything's under control. 

"Push the Button, Max"

Fate the Magnificent 

Dr. Sandi's picture

Professor, I saw your fine movie about a month ago. It cracked me up when you froze half of your moustache off on the iceberg.

Too bad about Natalie Wood. She was beautiful when she was around you.

francis_sawyer's picture

There was a graph on ZH the other day that proved, without a doubt, that there has not been enough platinum mined in all of humanity that could possibly contain Chewbacca's keister on it...

Ralph Spoilsport's picture

"Barry, does this coin make my ass look fat?"

"Damn girl, your butt blocks out the sun! We gotta get your ass its own zip code."

GMadScientist's picture

"Now....woman....I see...I see what you're....tryin' ta do here..."

She had back for days...I could put a week on it.

Winston Churchill's picture

How do you stamp a coin big enough to display Michelles ass

 if you keep the same scale as Oldbongwaters profile ?

Stoploss's picture

selling consumer products to the US.

LOL!! Guess what, were not buying anymore! Good luck with that..

HurricaneSeason's picture

Has anybody picked $20 trillion yet?  That's my number. As far as the official number, anyway. I'm not including derivatives and bank fraud and unfunded pensions and healthcare at the blowup. I think at $20 trillion we have interest rates double from loss of the reserve currency due mostly to our politicians being on television.

no2foreclosures's picture

$20 Trillion or WW3, whichever arrives first.

fonzannoon's picture

i pick temporary US default followed by downgrade followed by retroactive non default followed by executive order eliminating debt ceiling followed by members of congress tried for treason for allowing the US to "not pay it's bills". (and found not guilty)

ZeroAvatar's picture

No, but I still have June 1st in the 'Begin the Conscription' pool.

Trader Joe's picture

That article is a POS.

Bunch of cut and pasted nonsense.

Jesus, get some editorial control over this blog-O-site

Lots of great content here (e.g., Nanex stuff) but this is pure garbage

Bluntly Put's picture

I don't know, its basic. I link up ZH a lot in other forums, news, stats etc. A lot of those people are clueless, maybe some of them will wander through once in a while, read an article like this and grasp something at their level which wakes them up.

Whiner's picture

Debt bomb fuse ignited. 3-2-1- was that the 3 minute fuse or the 20 you rigged? "I'm sure it was the 29." (Coach-swoosh beer top pull). Lets watch and see.

EARLPEARL's picture

i really believe the debt of the private sector...the debt of 200 million americans is 100 times bigger problem than the government debt....there can never be growth , or consumption, or any kind of meaningful recovery until the private sector gets their debt under control

Anusocracy's picture

And government is a hundred times bigger problem than private and public debt.

It is the cause of both.