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.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Yen Cross's picture

 Nice "long form" explanation J.R. +1

francis_sawyer's picture

I've taken to calling them "joobux"... You know ~ for simplification & all...

SanOvaBeach's picture

Your a racist pig!  Obama was born in Kenya, all black people are lazy and on welfare, God is my guide, and last but not least...............u stupid redneck fucks out there, u know who you are, add the last one!

Burma Shave

SanOvaBeach's picture

Keep the Fed going!  I need $$$ for that spread in Montana...

blindman's picture

at risk of preaching to the choir, oh my god ..
there is more ....
"..HAMP, the signature program to aid poor homeowners, was announced by President Obama on February 18th, 2009. The move inspired CNBC commentator Rick Santelli to go berserk the next day – the infamous viral rant that essentially birthed the Tea Party. Reacting to the news that Obama was planning to use bailout funds to help poor and (presumably) minority homeowners facing foreclosure, Santelli fumed that the president wanted to "subsidize the losers' mortgages" when he should "reward people that could carry the water, instead of drink the water." The tirade against "water drinkers" led to the sort of spontaneous nationwide protests one might have expected months before, when we essentially gave a taxpayer-funded blank check to Gamblers Anonymous addicts, the millionaire and billionaire class.

In fact, the amount of money that eventually got spent on homeowner aid now stands as a kind of grotesque joke compared to the Himalayan mountain range of cash that got moved onto the balance sheets of the big banks more or less instantly in the first months of the bailouts. At the start, $50 billion of TARP funds were earmarked for HAMP. In 2010, the size of the program was cut to $30 billion. As of November of last year, a mere $4 billion total has been spent for loan modifications and other homeowner aid."""
and more ...

Read more:

Yen Cross's picture

Embrace your elders. Wisdom prevails. 

  Confucius say, " In a country well governed poverty is something to be ashamed of".

  Fuck off entitled libtards! You get work , or get steam roled!  No moar Starbucks!

bunnyswanson's picture

Have you ever considered that when the sold homes to people without verifiable income, AKA ~Predatory Lending~ that the banks were banking on the home owner failing to keep up with payments and that when the time would come, the plan was already in place to do the modifications - so to clear up the documents - call it laundering if you must - it's the same fucking thing.

The cash flow from this debacle is still flowing.  We don't hear about TARP warrants but apparently if you buy these "warrants" as investments, they can pay up to 175% return if the bank repays the TARP loan.  The borrowing bank must buy TARP warrants and then sell them as I understand it (correct me if I am wrong).

No one seems to know about these warrants - they were not promoted - another dirty little secret - but someone has, surely the investors on here have made some $$$ on TARP warrants.

I passed on a modification, even after dropping from 60 grand a year to 23 grand (now at 40).  But the bank keeps calling.  Last week, Chase FedEx an offer - a guarantee refi at a low rate .. begging me to fill it out by 1/3 of the offer expires.  But, I am an independent contractor and altho I am making my payments, may not meet their criteria as I did when I bought this play (14 years ago with 20 grand down fuck you very much).

Yen Cross's picture

 Bunny/ Are you Mentally Ill?  If you want to quantify/justify your business dealings on Z/H thats fine.

  Just change your douche bag before you mess with me!

Winston Churchill's picture

You are wise not to take up the HAMP mod.

If you can afford it you may want to spend $1500 on a forensic accountant,

and title report report on your loan.

75% chance its unenforcible even if the true lender came forward,which they won't for

a whole laundry list of legal ,and tax reasons.

Screw the banks, just as they are screwing us.

SanOvaBeach's picture

Your a stupid redneck!  U lost the election fuck head, get over it....

Ralph Spoilsport's picture

And "U" won the election but will lose the war along with the rest of us.

bunnyswanson's picture

Here is a link to the pitiful stories from 119 people who are attempting a Chase Bank modification.  They are all the same.  Waiting, denied, foreclosure.  Waiting, denied, foreclosure.  Most are refi attempts.  None that I came across were investors or people living on a shoe string budget  who should live in a shoe errr apartment or house rental...not own a home (the dream).

One woman’s relentless chase to obtain a loan modification from JP Morgan Chase.

In the last fourteen months Chase has repeatedly denied my request for a loan modification. Reasons have ranged from “lack of hardship” to “too much equity”; “unable to verify residency” and “still have three months cash on-hand”. They all add up to the same thing: Chase wants to further exploit the predatory lending practices employed by Washington Mutual, utilizing opaque banking procedures in the name of profits, all at the expense of the American taxpayer.

If I knew back in February 2009, or even August 2009, what I know today — that the investors behind my loan prefer to foreclose rather than work with me on a modification — I could have made an informed decision; instead I am scrambling to save my home with all the cards stacked against me.

Read my letter to David B. Lowman, CEO Chase Home Lending, JP Morgan Chase, regarding his April 13, 2010 testimony before the House Committee on Financial Services. Follow my search for answers.

Although it has been repaid, JP Morgan Chase received $25 billion in federal funding (TARP money) in a taxpayer funded bailout which helped facilitate the bank’s subsequent growth.

JP Morgan Chase also received $41 billion from the FDIC through a taxpayer backed debt issuance program. This money has not been repaid. In 2008, JP Morgan Chase absorbed Washington Mutual; the risks and costs associated with this deal were taxpayer funded.

SanOvaBeach's picture

I actually don't give a screaming fuck if you lose your home or not.  Hey, ego-boy!  U never had a home in the first place.  Just a big fucking loan you could not afford. Now that I have all your $$$$ (I'm an investor in JP Morgan Chase) we are gonna throw you to the dogs!  And there is not a fucking thing u can do about it!  Burma Shave

SanOvaBeach's picture

If I take out a 50 million business loan to start-up a business making blue widgets w/ spots.  My strong feeling is blue widgets w/ spots are gonna sell like hot cakes.  I'm WRONG!  My business fails!  Do I blame the bank for my failed business?  Let us take this another way.  I take out a $850,000 home loan because the house is gonna keep going up in price.  After all the value of homes has not gone down since the Great Depression.  I'm WRONG!  The values have gone down.  Do I blame the bank for my wrong decision.  Do I or should I take a sleg hammer and bust up everything inside just before I'm foreclosed on?  When I took out that home loan, my eyes were wide open  I knew what I was getting into.  Don't blame the bank losers, blame youself!

francis_sawyer's picture

Don't blame BitCoin... Blame yourself... [some day in the future]...

SanOvaBeach's picture

U don't even know what Bitcoin is u goof!  Thats like, "bears are bad".  "What is a bear?"  "What is a bear?".  "I don't know, but their bad".  I love your since of logic!  Kind of reminds me of Nutneg Whitman.

samsara's picture

And Now class as a further indication that the Obama Whitehouse is just the 3rd term of Bush/Cheney, we look at the US Debt Ceiling graph. Notice that Bush/Obama period is a perfect progression.

Look at the graph just since 911. That is a major trend change starting point.

Do you ever imagine what things would be like if there wasn't a 911?

knukles's picture

You mean like the good old days.

(Jesus H Fucking Christ!  Did I really say that?  Next thing I'll be reminiscing about those good olde "Impeach Earl Warren" signs farmers used to have painted on the sides of their barns.)


Don't have to feel
Like Matrix meat
Becuse you ate
The red pill

Burma Shave

SanOvaBeach's picture

Kopy Kat.............think-up your own shit, asshole!!!!!!!!!!!!!!!

Burma Shave



mendigo's picture

Its a very good point.
Basically osama managed to bankrupt the nation.
I thing that in fact he pretty much died laughing at our ignorant response to an isolated act of terrorism. He succeeded beyond his wildest dreams at collapsing an almost great nation.
the connect used the event as an excuse to fleece the nation. Just as well a nation so ignorant and lazy is dangerous and needs to be stripped of its influence.

mvsjcl's picture

Osama? Really? And his 19 boxcutter-wielding cohorts? And one large container of laws-of-physics-suspending magical pixie dust? You mean that Osama?

ramacers's picture

don't get mad, get.... and hone the blade for the smug, elitest political master classers.

Yen Cross's picture

 Pythagoream Theorems of finance /  I thought Quantum {fuzzy economics} solved Human Nature, and it's spending habits?

malek's picture

The article is pointless unless it introduces the concept of notional debt... which can grow indefinitely.

yogibear's picture

It keeps increasing until it's realized that Skittle Pooping Unicorns don't exist. 

Right now the Bernanke and the the Federal Reserve keep printing to make people believe that Skittle Pooping Unicorns do exist.

Wouldn't be a bit surprised to see Fitch, Moody's and S&P change nothing until US debt is well over $20 trillion. Who's your daddy raping agencies, Fitch, Moody's and S&P?

Yen Cross's picture

  For some wierd reason April comes to mind. No guidance= forward earnings. Europe in a quagmire.

 Ask Steve Lies-Man?  Sock Puppet > extraordiniare 

 The Krugmanites are out tonight. Too much time on their hands. /pussys/

blindman's picture

oh shite ...
"In the end, there was no lending requirement attached to any aspect of the bailout, and there never would be. Banks used their hundreds of billions for almost every purpose under the sun – everything, that is, but lending to the homeowners and small businesses and cities they had destroyed. And one of the most disgusting uses they found for all their billions in free government money was to help them earn even more free government money." ...

Read more:

Kreditanstalt's picture

Answer: The debt crisis can go on indefinitely.

No one has yet given me any reason why the Fed's balance sheet can't be indefinitely expanded as far as necessary.  In fact, it need never shrink...

bobert's picture

A popular uprising is your answer.

francis_sawyer's picture

Beats the hell out of an 'unpopular' uprising...

francis_sawyer's picture

Beats the hell out of an 'unpopular' uprising...

SanOvaBeach's picture

Your right, sweetheart!  And this blog well keep on going and going.  Keep's gett'in propped-up.  Don't yea just love it! $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$

holdbuysell's picture

According to the videos in the links provided here, the fall of the petrodollar is enough by itself to cause a collapse in the currency. And China is well on its way to enable this.

Bernanke would not even need to hit the CTRL-P again to cause the fall, But he'll need to do so to continue to fund the military to defend it.

Fait accompli.

Yen Cross's picture

 Ok everyone. Based on the Friday close. Risk is going higher, after the gap gets filled in Asia.


    Europe will fill the trading screen next week.  Be well/ trade well

tony bonn's picture

" and manufacturing are being lost to more competitive nations..."

more competitive my ass, asshole! it's called slave plus many other us manufacturers pay the most selfish pecuniary wages since white plantation owners fed slaves 1 or 2 meals per day. i do not buy nike anything - they are slave owners....

on the other hand, the federal reserve runs a consol system which means perpetual debt, perpetual interest, and perpetual slavery, just the way slaveholder nike wants it. abolish the fed to free your selves....and chalmers johnson already described the imperialistic dynamic of reserve currency nations and their foreign aggressions to maintain their luxurious self indulgent selfish lifestyles long before the goober you cite did so. but a good truth is always worth retelling.

SanOvaBeach's picture

The robots at my factory have made me and investors millions.  The plant is located in SoCal.  Have a nice day!

Bansters-in-my- feces's picture

"Why did the US debt grow to these proportions?"

Answer = Compound interest from private bankers.
Oh ya.....Bitchez.!!!

blindman's picture

debt is all, that is the source and salvation,
there is nothing beyond debt in a debt based
colony. the identity of the owner and extender
of the debt, from thin air, is just the lord, an
aspect of one's own self, metaphysically transcribed
into the consciousness of the individual mind stuff.
the servant becomes the self and soldier dependent
and part and parcel ....
soul soldier
but there is always, thankfully, resistance and rebellion.
and on a good day, music

jonjon831983's picture

Wow shit. Austria derivatives bomb "Austria plugs regional finance loopholes after scandal"



"They put the book loss at 340 million euros ($444 million), but experts are still trying to determine the state's exact exposure."


This woman probably is the fall... woman.  Guessing a case of plausible deniability for the gov't.

Tom Green Swedish's picture

But just like your life that debt fuels growth and debt is money.  If you spend it on worthless crap and not investments though its just throwing it away. If you spend your home mortgage loan on a vacation or a boat, you're not going to get any returns, but if you use it to buy something that produces something it will.  Like the jelly of the month club.  It's the gift that keeps on giving. But buying a jelly factory is no fun. Which is the case of the USA.  We are borrowing money to support welfare, unemployment and regulation / law enforcement / military, basically crap that doesn't make anything grow but the government and retailers (Sales Tax + Retailers 35 percent corporate tax rate).  You don't grow a country that way, because eventually you have to pay the money back (plus interest - 200 billion a year), and quite frankly maybe Japan and some other countries might want our military technology or even our greatest friendly Big Red China might too, (great news for us), I really don't think we're going to get much out of our investment in welfare and unemployment benefits.    Would probably be better to spend it on whores, at least they're not a threat to our economy, unless they go on a Chinese spending spree.  Women make more money nowadays anyways.  Fuck it.


Here's what I'm saying.  Even if you run big huge deficits you can get away with it as long as it will provide for the future.  The USA is clearly not doig this besides with military expenditures on technology - that's it and unless they are about ready to bust of the Tesla death ray (which he said would only cost 2 million to build) I doubt we got our money's worth, in all reality we're paying 1 million a year to have some foot soldier paint shit in Afghanistan each year.  The regulations the welfare it gets us nothing in return.  It's just like if I used my credit card to amass a huge debt in some gold mine.  Yea I'll have a huge deficit but it will repay itself.


On the bright side, I'm sure Asia will be happy to lend to us until we stop buying their stuff.  Then at which time when they hit their peak we become even and turn into Greece and have our own 97 Asian debt crisis meltdown which would surely fuck things up but would make their labor uncompetitive with our crap minimum wage, and or the rest of the world's for that matter and make them equal to us, or perhaps not if we INVEST IN JOBS FOR THE FUTURE. Seriously, if these clothing and electronic manufacturers can't find a way to make a 5 pairs of jeans in an hour with a minimum wage serf thing will continue to suck for them.  But money is just a tool for their Agenda 21.

jonjon831983's picture

The idea of collapse of reserve currency and the effect is out there... spreading... but the details and path perhaps are only starting to be revealed.  Only some people have heard of this.  Even fewer if any even understand the significance of this... and then the question of how it comes about...

But as more countries move away from using the reserve currency ie. bi lateral FX deals between china or russia or india with other countries... then slowly game over.

IMO The key of Oil... for USA to survive in post-reserve currency world they need alternate sources of Oil.  Friendly... like Canada... or domestic... otherwise, currency hyperinflation time and they'll be locked out of access to Oil and everything else dependent upon USD for purchase.

groundedkiwi's picture

Iran is surviving without the reserve currency. 2013 we may see a reset with Iran as the sanctions are hurting the reserve currency more than they are hurting Iran

jonjon831983's picture

I would think they're surviving because the "others" ie China/Russia are supporting them.  Especially since the heat turned up big time after Libya and now Syria.

JR's picture

There may be more oil in the U.S. than in the entire Middle East according to several claims.

One claim is that the Bakken oilfield in the Dakotas and eastern Montana has the “largest oil reserve in the world. Only a thousand feet beneath the Rocky Mountains lie more than 2 trillion barrels of oil.

“This is more oil than the entire officially proven oil reserves in the world.” In fact, it's enough to fuel the American economy for 30 years.

The bakkenblog reports:”The Bakken (BOKK-en) and Three Forks are vast, deep rock formations rich in both natural gas and quality crude underlying much of the western third of North Dakota in addition to broad areas of both Montana and Saskatchewan, an area the size of France.”

jonjon831983's picture

Apparently, there is one off the coast of Cali as well.  The issue is how good these sources are in terms of quality, amount recoverable, and how fast they dry up.  I think Testosterone Pit had a posting about Fracking in general.

Methinks there is plenty of good recoverable oil within US territory, it's just been saved for a "rainy day" and protected by regulations and creation of national parks.