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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blindman's picture

20 years o schooling and they put u on....b.d.
look it up

Peter Pan's picture

As I keep saying, the debt is not the real issue. It's the unfunded liabilities that are piling up at a faster rate than debt that is the real concern. The point will be reached where no amount of printing will be able to fill that hole in the future.

As a simple example, imagine a point in time where there are 2 retirees for every one worker. No matter how much you print it's the physical immpossibility of having a functional society that brings the show to a close and the lack of both human and physical resources to keep the promises made in respect of unfunded liabilities. Not the lack of money.

Radical Marijuana's picture

This article was quite good, although it underestimates how bad things actually are.

For example, this article stated:

Doing the “right thing” is usually political suicide for politicians.

Real history provides an overwhelming pattern of the biggest gangsters, the banksters, assassinating politicians that could not be bribed or intimidated. As the book about "Economic Hit Men" pointed out, if they failed, then the "jackals," the assassins, were sent in. Or, if that was not enough, then that country was invaded, and "bombed back into the stone age."

The real world operates according to the principles of organized crime. It is superficial to focus on the puppet politicians who get elected by appealing to the masses of muppets. The maximum leverage was achieved, with the most ripple effects, from the funding of the political processes, and paying assassins to kill politicians that refused to do what they were told was the foremost manifestation of that.

Today, we are used to the runaway fascist plutocracy juggernaut system already existing. However, it was built through the funding of the political processes, where the money system paid for the murder system, and then the murder system backed up the money system in return. In that overall context, nothing was more crucial than paying for the assassination of politicians who refused to become puppets, of the covert criminals that thereby took over control of the public governments.

Doing the “right thing” WAS usually political suicide for politicians in LITERAL ways during history. The current pathetic political puppet politicians, pandering to the public through the mass media, are the downstream result of previous critical bifurcation events, when the good politicians were discredited or destroyed by dirty tricks played against them. That is also why fixing these real problems continues to be EXTREMELY DIFFICULT AND DANGEROUS!

Setarcos's picture

Yes JFK was killed, Saddam Hussein/Iraq was killed - for wanting to sell oil for Euros - Qadafi/Libya was killed for wanting to set up an African gold-backed dinar.  And such examples are just prominent tips of 'icebergs' which threatened to sink the 'Titanic' of global banking.

I used to believe in the fallacy of "sovereign nations" and that these, unlike households, were immune to the ordinary 'laws' of finance; but I went on a steep learning curve and realized that countries, ruled by politicians these days, are no different from petty kingdoms of old, because they borrow from private banks/money lenders to fund their wars especially; then tax their populations to pay the compounding interest charged by the usurious money lenders who demand their "pound of flesh", as Shakespeare and others knew, centuries ago.

The US/NATO military is nothing other than a bunch of mercenaries for the banksters who fund wars and back both sides ... perhaps never before as blatantly as today with 'derivatives', 'futures' and other financial weapons of mass destruction.

NO ONE dares buck the banksters at any level that matters, because he will be kllled and politicians generally are SO corrupt that they are subject to MAB, i.e. Mutually Assured Blackmail ... simply put,  "If you tell on me, then I will tell the presstitutes that you have a thing for little boys/whatever."

jonjon831983's picture

I don't get it, why do I keep hearing of bitcoin.

What happens if something happens to our electronics or something. What happens to the bitcoins.

From what I heard you need to "mine" bitcoins via CPU processing.  What if not everybody can afford a computer or the processing power to do it?  Talk about energy hogging as well if "everybody" ended up flipping their electronic devices' CPUs to max.

SanOvaBeach's picture

What if a metorite hits the earth!  What if I get in a auto accident!  What if they stop making Hostess Twinkies!  What if the Internet goes down and I can't get on Zero Hedge!  What if I get my girlfriend pregnet!  What if it rains tomorrow! FUCK!  I'm just going 2 stay in bed and read comic books all day!

AgAu_man's picture

Einstein warned us decades ago... When asked, what the greatest invention of the 20th century was, he responded in his typical wit plus insight: "Compound Interest".

Whereas Special Relativity takes time to grasp, and General Relativity is not for the C students, even these should be able to grasp the primary school (gr.7-8) math of compound interest.

Yes, whereas only 'God' can create something out of nothing, compound interest and bankers are clearly the exception to natural laws: money making money. Screw the laws of thermodynamics, right? Is this what Blankfein means by "Doing God's work", creating something out of nothing? ;-/

If only FRB were taught also, ALL school children could figure out the great national Ponzi. Alternatively, just apply the same rules to Monopoly, when YOU play the banker, and increase the game's money supply.

q99x2's picture

Throw the banksters and their institutions out of the country. Get those parasites out of the system, redistribute what's left into an open source currency system and move on. The pigs have run out of slop. We don't need them and they don't need us. Fuck you Bernanke.

aleph0's picture



..."To put $1.3 trillion into context, it is approximately $3.56 billion a day"...


= $12 / day / person(US pop)



SanOvaBeach's picture

Where is Redneck Freddie?  We all need his incrediable wisdom and genius to set us all straight....................

AnAnonymous's picture

Can the scheme go forever? No.

Can it go until the resources are depleted? Yes.

So, mission accomplished for 'americans'.

It is somehow quite funny to read 'americans' who keep flaming about inflation claim that it will take for the US market to extend consumption to keep extending the debt.

With a levelled or even decreasing consumption volume, debt can be increased.

All it takes is a shrinking environment. And fine, one heading for depletion of resources fits the bill.

As consuming gets more expensive due to resources being depleted, for a same volume of consumption (or less), one has still to go deeper and deeper into debt.

As to the interconnectivity of the world, the 'american' future is clear:

one will descend of people who consumed a lot thanks to debt, stole a lot or one will descend of people who consumed much less and got stolen a lot.

One alternative is better than the other. 'Americans' figured that one a long time ago.

TheFourthStooge-ing's picture

AnAnonymous said:

Can the scheme go forever? No.

Can it go until the resources are depleted? Yes.

So, mission accomplished for 'americans'.

Totally off. More exportating blame to convenient exterior to avoid self indiction. Here we see this Chinese citizenism citizen author, unable to conquer Chinese citizenism eternal nature, is fully acted by it.

One can clearly see Chinese citizenism pattern of resources consumption at the pheriphery. Now with their clever stealth, Chinese citizenism citizens are blobbing up to consume Africa, cutting through it like a hot knife into butter.

With the Chinese citizenism strategy of pheriphical resources consumption, one could easily say mission accomplished for Chinese citizenism citizens.

Ralph Spoilsport's picture

While Chinese citizenism engineering consumptionists built Three Gorges Dam with enough concrete to alter the planet's spin, much care was taken to protect the environment by covering it with a huge lake. Thusly Chinese citizenism makes Hobson's choice very much something by utilizing valuable resources so 'americans' cannot commit depleteionization. Thereby the worm in the apple is spared the hot knife as to pointing out the point eternally forever notwithstanding.

akak's picture

Very crusty. 

You have gripped the mattering thing goodly.

mind_imminst's picture

The creditopia is even worse in the present day because buying crap no longer produces more jobs because so much "crap-manufacturing" is automated

forwardho's picture

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.

Stop repeating the BIG LIE.

In December the U.S. bought 90% of its own 30yr long term bond issue. This does not include operation twist[back dating bonds that are maturing]

No one wants our debt,

We are trapped in a collective fantasy.

The "debt" is an illusion that keeps our country from imploding.

The "debt" is a LIE.

smacker's picture

A very good analysis of the US economy.

On the benefits to the US economy of the USD being the global reserve is often overlooked that this status created an endless demand for USD by foreign nations in order to buy their oil and other commodities, bought & sold in USD. IE: you have to buy the dollars before you buy oil.

This in turn provides FX strength to the USD which in turn has allowed the US FED to operate significantly lower domestic interest rates for many years, without causing price inflation. Perhaps rates which are 1-2% lower than competitor nations.

Low interest rates has funded low-cost corporate investment/expansion and of course consumer credit. Also, as the Middle East oil producers (most notably Saudi Arabia) accumulated mega-surpluses of USD, they spent them on building huge domestic infrastructures and buying American Cadillacs, Of course it was the likes of Bechtel who got the building contracts.

Quinvarius's picture

I don't think there is any limit to the debt.  The Fed will just keep buying it and propping up whoever would have needed the interest in a real economy.  The limits will only appear as a loss of purchasing power of the dollar, lower standards of living, and damage to the real economy.  As long as the government can continue to drain the wealth of the nation, it will.

Disenchanted's picture



OP asks:


Why did the US debt grow to these proportions?



"The Federal Reserve system is a deliberate trap, to enslave a population to unpayable debt in order to control and exploit them"


How we were led into and kept in the trap:


"Modern banking is not a science. It is a religion, simply a set of arbitrary rules and assumptions that favor the masters of that belief system, which we are brain washed in school to think is something tangible and real."


What is taught today as to the cause of the American Revolution...Tea Parties and Stamp Acts? What did Ben Franklin say was the real cause:


"The refusal of King George 3rd to allow the colonies to operate an honest money system, which freed the ordinary man from the clutches of the money manipulators, was probably the prime cause of the revolution." -- Benjamin Franklin, Founding Father


Quotes from:

Awaken slaves! - How The Private Central Bank Ponzi Scheme Trapped And Destroyed America



tuttisaluti's picture

Does this also mean the US is not interested in a lower oil price because we would need less us dollars to pay for it?

SlowMoney's picture

Any bets on when the US dollar will lose reserve currency status?

Is eveyone on the planet stupid? Don't you think that they all know they will never get their money back.

So I ask - why are they still buying our debt???


DosZap's picture

So I ask - why are they still buying our debt???

Who is except Japan, China is slowly getting rid of it, and using it to buy HARD assets.

Bernie is the Number 1 buyer, and the Sheeple.

orangegeek's picture

US Dollar will lose reserve currency status when they dismantle their military.


That should occur around never.

epwpixieq-1's picture

It has already started as a process, you just have to look for the particular news around the world, and although it is definitely non linear, probably ( on a longer term ) can be best described by an exponential curve with a non linear function defined only in a limited interval. And, although, we are at the beginning of this slow change, we shell see its end soon enough, as it definitely has a big feedback signal that creates the nice, exponentially looking, increment.

SmoothCoolSmoke's picture

"The debt ceiling has been increased 10 times since 2001."

So Bush raised it 9x, Obama 1x, heading for 2x.  Hmmmmmm, let's see, St Ronnie Reagan, the great hero/god of the fiscally conservative, raised the debt ceiling 18X.  Once more.... 18x!

So if Obama is an unmitigated asshole for 2x on the DC (Freddy?, et al), can we agree Reagan was 9X as big an asshole?

Oops, I forgot, Reagan was a white guy.

Arthur's picture

On this board we  care about green, not black or white.

WmMcK's picture

Oh, I thought it was black or red but sometimes (too often) the ball lands on green and everyone loses (except the house, of course).

Arthur's picture

"In a real free market, people save money for a purchase."


Which free market was this?

Nothing is wrong with a prudent use of credit.  A classic example is a toll bridge.  Build it to last 50 years, pay it off in 20 which allow people  to use the bridge paying back those who fronted the cost modestly over time.

The Problem is what the government is spending on, not that it is borrowing per se.  

It is not just a question of spending less, the question should be spending on what.

How to get the politicians to act like responsible adults is the big question.

Here is a start.  Eliminate the mortgage deduction over the 20 years.  No immediate harm to the RE market and everybody can adjust.  Same thing with entitlements, wind them down overtime.  If we don't people will get f*cked.  Otherwise in a few years current pensions will be cut severely and the dollar devalued screwing a lot of average mopes.  Look no further then Greece or Spain.  It can happen here too.

Mad Muppet's picture

The State is my Shepherd, I shall not want.

devo's picture

Higher than everyone thinks.

falak pema's picture

This guy posts on ZH but I haven't seen this article here :

A New Era Of Oil Renaissance - Business Insider

If Econmatters is vaguely right it is an interesting line of thought that contradicts the Peak Oil predictions of Oil drum and Oil man which seem prevalent amongst the scientific energy community. 

Energy is the NAME of the game for the next decade. As finance is all fukked up. 

Meanwhile in Europe this : Cameron's absurd behaviour over EU membership | Peter Mandelson | Comment is free | The Guardian

Money Squid's picture

"This guy" is an idiot if he thinks tight oil is the solution to continued economic growth. I recall the average cost of a complicated well completion for tight oil is something aroun $3 million per well, and the production decline rate for these types of wells is steep in the first year. The oil does not flow to the well unless the oil can access the artificial permeability due to the fracturing process (reach of the well). Once the oil is drained it must be re-fracked/re-stimulated. The cost and complexity are high. Gas prices must remain high in order for this method to be used, but gas prices are directly related to GDP and the US economy is accustomed to gasoline at around $2.50 - 3.00. Unless gas prices go down significatly there much less money available by the masses to fuel any type of temporary recover. And, if prices go down, gas consumption goes up, depleting the tight oil plays ever faster. The peak may be postponed with the last ditch efforts but the decline will be steeper and more painful. Just like cuttig deficeit spending. Oh well off for a few drinks.

Money Squid's picture

Dramatic graphics like those in the article are silly. The stacks of bills can and will be replaced by a few $1T coins or bills. You will need a powerful zoom button to view the lobby floor of one of the tall buildings, then zoom further to see a man's shoe, then further still to see the small stack of coins next to the heal of the shoe to demonstrate the size of $50 trillion dollar debt.    zzzzzzzzzzzzzzzzz

luckylongshot's picture

This cyyle of debt exploding has occurred regularly throughout history. However there is no evidence that austerity ever helped in faixing the problem. What did help was debt cancellation. This happened regularly in history and would work today as well. Furthermore as the mountain of debt clearly was created without any consideration backing it, the net effect of cancelling it would not amount to an actual loss to those that created the money in the first place.