Guest Post: About That $20 Trillion In Public Debt...

Tyler Durden's picture

Submitted by Charles Hugh Smith of OfTwoMinds blog,

Massive Federal deficits require higher taxes; ever-expanding public debt and higher debt service sets up a death spiral once new investment is crowded out by Federal borrowing.

In only three more years you're talking $20 trillion in public debt for the USA and a GDP going nowhere fast. And what does that look like in terms of the S&P 500? Courtesy of frequent contributor Chartist Friend from Pittsburgh, here is the SPX charted against total public debt. You'll notice it's crashing:

What this chart reflects is another aspect of the death spiral I described yesterday in The One Chart That Says It All: when depreciation outstrips new investment, then productivity, income and profit all decline. As interest on skyrocketing debt rises, then more income must be diverted to service debt, leaving less for new investment. That sets up a positive feedback loop, i.e. death spiral.

Here's how rising Federal debt creates a death spiral in the economy. As Federal debt skyrockets, the cost of debt service rises, even at super-low rates of interest. That means taxes must rise, because no constituency will allow its share of the Federal budget to decline by more than a symbolic amount. Higher taxes means there will be less money available for new investment, and the enormous sums of Federal debt that have to be sold crowds out other investment.

Interest rates have been manipulated lower for a few years via the Fed buying Treasuries with freshly printed money and a perceived "flight to safety," but eventually the Treasury will have to compete for investors' cash, and rates will rise.

The Federal government already borrows more per year than most country's gross national product: about $1.5 trillion a year. You can look it up here: Public Debt of the U.S. That's roughly 10% of the U.S. GDP, added to public debt each and every year.

Public debt on March 21, 2008, four years ago, was $9.39 trillion. Today it is $15.57 trillion. The difference is $6.18 trillion. Divide by four and voila, $1.5 trillion has been added to the debt annually.

Ignoring the politicos' shuck and jive about "balancing the budget" as tiresome political theater, let's multiply 3 X $1.5 trillion = $4.5 trillion, and add that to $15.57 trillion: in three years, Public Debt will top $20 trillion, on the way to $30 trillion.

As I proved in Can We Please Stop Pretending the GDP Is "Growing"? (June 2, 2011), GDP in constant 2005 dollars is essentially unchanged since 2007.

In constant (2005) dollars:

GDP in 2007 (pre-recession): $13.23 trillion
GDP in 2008 (recession starts): $13.31 trillion
GDP in 2009 (recession officially ends in mid-2009): $12.88 trillion
GDP in 2010: 13.04 trillion

GDP in 2011: $13.3 trillion

In constant (2005) dollars, the economy actually shrank in the three year span of 2008-2010 and is back to 2007 levels. That's what we bought with $6.1 trillion in additional debt and Federal spending.

Just as a refresher:

Federal revenues

2007 $2.56 trillion
2010 $2.16 trillion

Federal spending

2007 $2.72 trillion
2010 $3.72 trillion

In three years, Federal spending jumped almost exactly $1 trillion, or 36.7%.

In 2011, the Federal deficit is 11% of the nation's GDP.

In 2011, the Federal government borrowed 42% of its expenditures.

As the recession ended in mid-2009, we're almost three years into a "recovery."

Over 40% of Federal spending is Social Security and Medicare/Medicaid. With Baby Boomers retiring en masse, 2 million new beneficiaries are added every year: Social Security system (Wikipedia). Add in Defense spending and roughly 2/3 of the Federal budget is politically untouchable. Then add in 11% debt payments. There is little room to move here politically, as every program of any size is a "sacred cow" or "third rail."

The Social Security Administration states that 157 million people pay into the system, and 56 million people are receiving benefits. This 3-to-1 ratio may seem sustainable, but we have to factor in that 38 Million Workers Made Less Than $10,000 in 2010— Equal to California's Population, while 24 million contributors make less that $5,000 annually.

A program that routinely pays $20,000 a year to higher-income recipients and collects $700-$1,000 a year in income from tens of millions of workers who are in line for benefits is not sustainable. If we factor in the low Social Security taxes being paid into the system by low-income workers, then the ratio drops to about 2 workers for every beneficiary.

The demographics are not encouraging.

Taxes of all sorts will have to rise. Cuts will be symbolic because the political pain will be unbearable. Most observers note that increased taxes lowers consumption and that will hurt the economy, but lower consumption is the least of our problems. The real problem is there is no end in sight to skyrocketing public debt and interest on that debt, and that double-whammy of higher taxes and competition for scarce investor cash will erode the capital available for productive new investment.

Without productive new investment, then debt service soon outstrips income growth and the economy enters a death spiral of declining productive investment, ever expanding debt and ever higher debt service costs.

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jcia's picture

Roses are red
Violets are blue
Come over here
So I can stick it in you


ndotken's picture

just shut up and eat your ipad

HoofHearted's picture

Shit, CHS has to harsh the weekend buzz with reality.

Lalalalala I can't hear you. It's all okay and hopey and changey and all the other damn dwarves running around here...

IrritableBowels's picture

Dude spits truth. Thanks for the contributions CHS.

franzpick's picture

And, according to the gold/debt chart TD put up some months ago, AU goes to $2158.

The Alarmist's picture

If you add the debt of the States and municipalities, you can only look wistfully back to the days when the US public debt was only $20T. The rubicon was passed long ago.

bigun's picture

i really enjoy ZH, but has tyler thought about the reverse causation?


perhaps its not high amount of debt that causes stagnant growth

but stagnant growth that causes a high amount of debt?



TruthInSunshine's picture

Many of you know this and will agree with me. Some will want to refine what I say or amend certain parts. Some may not understand for whatever reason(s). Others will disagree for whatever reason(s), saying that I am incomplete or wrong in the analysis.

We reached a point during the Fed's print-a-thon whereby any additional unit of fiat (remember; The Bernank has a technology called the printing press, which allows him to print as much money as he wishes at essentially no cost) that is conjured from thin air and distributed as an electronic credit [mainly to institutional members of the fractional reserve banking system] to any entity not only fails to stimulate consumption or demand in the real economy, but actually thwarts such consumption and demand, and creates a secular cycle of deleveraging on the part of consumers and businesses [this is why even large businesses making nominal record profits are selling large batches of debt - aka hoarding cash - especially given the ultra low rates they can do this at compliments of ZIRP].

The global money base has doubled since 2007. Now, view that correlation in the context of considering the current amount of sovereign and private debt officially in existence at present.

U.S. banks and bank holding companies are now holding trillions in excess reserves, but their traditional model of profit making is either crippled or broken (i.e. lending large amounts of fiat and reaping the spread that lower cost Federal Reserve loans cost them), given the lackluster demand for debt (with the exception of credit card, unsecured debt, but there's a huge caveat there, also) from actors in the real economy.

Getting back to the thwarting of additional demand and consumption with each additional unit of fiat conjured and distributed:  The precise reason this is the case is because as the banking system's traditional profit generating model of loaning out larger batches of fiat and capturing the spread on interest it charges and that it pays to the Federal Reserve, banks now have either sit on the excess reserves provided so generously by The Fed, or find alternative methods to and avenues to place this cheap-cost fiat, to generate income. Some of this fiat is making its way into speculative buying of all asset classes, which is undeniably creating inflationary trends in commodities and other assets, which then acts as a tax on consumption by actors in the real economy (especially one whereby unemployment/underemployment is structurally high, and wages are falling behind the real rate of inflation).

Obviously, the other component in this broken market that Bernanke has fostered is that the reason why much of this cheap-money fractional reserve fiat loaned to the banking system is just sitting in excess reserves is because of the massive amount of liabilities on still-deteriorating loan portfolios these banks are holding, as Congress essentially gave a liberal license to engage in mark-to-unicorn valuation methodologies, and many of these banks (maybe 25% to 35%?) are, in reality, functionally insolvent, even if the regulators not only don't want to admit this, but are doing everything in their powers to deny it.

Hence, we're in a pure kick-the-can, extend & pretend, economic crisis, whereby Bernanke's best outcome can be a general, as slow-as-possible under the circumstances, sloped decline into the reality that will equal equilibrium, whereby living standards and consumption and production would take a far more panicked (and quick, volatile) path into equilibrium if more people were aware of the real value (i.e. far lower) of their artificially juiced assets that they are holding, which would result in a cascading crash as panic sets in.

Bernanke's printing is actually killing the economy, in large part, as it's sapping real consumption and loan demand, given economic fundamentals, and is meant as a palliative measure by someone who does not believe the patient can really be restored to any degree of true health.

Bernanke's dosing morphine, knowing that the morphine will lead to a worsening of the underlying condition, as he's powerless to heal the disease (a free market approach could remedy the situation, though - honestly), and just wants to prevent the frog from going into cardiac arrest.

boogerbently's picture

Here's the plan....

Give Trillion$$$ to your benefactor/contributor/crony banker buddies, whose irresponsible greed CAUSED the recession.

They use the free money to buy govt. debt, and make the interest, instead of loaning it out, like they were supposed to.

Tell the public the banks have paid back these loans, yet, simultaneously, (somehow) that debt is added to the US deficit, which the public is responsible for.

Tell the public the best way to reduce this new debt is to reduce or withold the govt. mandated retirement savings that an entire generation of Americans has been contributing to for a lifetime.

Convince the younger taxpayers the same thing WON'T happen to them!

50 years ago:

"Yes, it's an added tax, but think of the "security" in knowing that $$$ will be there for you when you retire..."

50 years later:

"Don't count on that money being there when you retire" ????

Thereby eliminating the $3.5 TRILLION debt, the Treasury owes to Soc. Sec. fund......which made it appear insolvent in the FIRST place.


You know what, guys. Just keep electing these same "2 party" shysters, and we'll have these same great game plans forever.

Any wonder why "obamacare" isn't popular??

See Welfare, Disability (another drain on Soc. Sec.), foodstamps, farm and oil subsidies.....

The ONLY well designed govt. program was Soc. Sec.....and they had to flat out STEAL money to fund "other" programs to derail it.

Gotta go......real housewives/NJshore/AmericanIdol is on. LOL




natty light's picture

"Social Security benefits is not a contractual right."



It's just another tax.

davey's picture

People have to understand that bank profits are paid by the taxpayers. All the banks do is buy treasures. The banks are just another fed vehicle of quantitative easing.

DCFusor's picture

+ right on.

You forgot the last line:

Since the reserves are reported, but the true value of mark to unicorn "assets" isn't - the reserves aren't real.

hangman's picture

excellent post...!  actually 'actual' implication of going down this slope is worse than the article is trying to convey.  As I said previously, our basic ideas, beliefs, culture, etc., the core fundation of our western civilization is coming undone at the seams. 

For that reason (our leaders know what's going on but they really don't have many good options at this point), in other words, we are crossing into 'point of no return." 

Simply put it, the western civilization almost collapsed (recent credit/financial crisis) and still face disintegration.  I am not saying we won't exists but certainly other countries will be more than ready (increasingly) and willing to fill the void, etc.

In the final analysis, if we stop borrowing, America as we know will collapse!



malek's picture

In short we are going Japanese.

Japan has made it 20 years so far, I don't believe we are going to last that long.

TruthInSunshine's picture

I have a long term trade that I will roll over that U.S. equity markets will follow the general path that the Nikkei has from 1989 onward,

Actually, that process began in 1999, and we're now 13 years into a secular bear market in U.S. equity markets, whether judged in nominal, or especially real, terms.

Some claim that there are too many fundamental differences between the U.S. and Japan as they relate to equity markets for this to be possible, let alone likely.

In reality, the U.S. is now demographically set up whereby a larger group of retirees and soon-to-be retirees will be withdrawing funds at a faster pace from U.S. equities (whether directly, by liquidation to raise cash, or indirectly, as a result of cashing out 401(k)s and other retirement funds tied to equities) than a smaller group of younger workers can replenish equity inflows, by a margin of about 3 to 1, and that doesn't adjust for the fact that the 1/3 the size group of younger workers are making less in real wages than the retirees or near-retirees, and are also not receiving the types of employer-based incentives to invest in equity funds, such as 401(k)s and matching retirement funding by employers (these benefits are actually more and more rare, whereas they used to be common).

Element's picture

Just a friendly, "you're totally kidding yourself", here TIS.

Japan had a ravenous and eager global-consumer, powered by an epic and reckless global credit bubble, in two hemispheres, to pull them through to mere deflationary stagnation with full employment for 20 years.

What's been happening, and what's still coming, will be an accelerating global demand capsize, with the loss of all hands.


The prior inertia of complex entrenched production, trade and consuming patterns, is keeping it running-on (empty), for now.

Like credit and malinvestment effect, the winding-down of demand is going to be progressive.   Slow, then less slow, then all of a sudden.

The 25% collapse in global trade in late 2008, 'bounced', because of the inertia in the trade system.

Something with so much pent-up energy still takes time to wind-down outside of such transients.

The delivering cycle has barely begun, and most of it will occur via default, because demand is not going to be there to support a more progressive failure-mode.

Massive printing is only a facet of what would be necessary for stagnation.

JW n FL's picture



TruthInSunshine ,


I quoted Lizzy.. that is not what I said.. it is what she said.

Tyler himself said he was under threat of Law Suit from the JEWS!

Only Sourced and Sited Material is ALLOWED when discussing the JEWS! no personal opinions what so ever!

So what do you mean put up or shut up you coward?

P.S. I would really love to meet you face to face. So YOU! can put up or shut up!


Incubus's picture

Ever seen a dragon fuck an addict eagle?



ZeroPoint's picture

Those that act proactively will always be more prepared on many levels.



GenX Investor's picture

Classic "cup-n-handle" move.  What does it look like when people go to a barter monetary system?

johnQpublic's picture

but who will rule bartertown?

AmericanFUPAcabra's picture

tina. with them shoulder ring things. mmmmm

SheepDog-One's picture

Yea so therefore in 3 years the 'DOW 24,000' will actually equal about 4,000 in real terms but as long as the numbers look high, 'all is well', right? Sure we'll have people starving and shot dead in the streets, but as long as we have a green stock market, its all good. 

carbonmutant's picture

We're not going to make it to $20 trillion...

t_kAyk's picture

we're going to need a bigger printer... 

mayhem_korner's picture




BTW, have they drawn straws to see whose face gets on the $1 Trillion bill?  I think it has to be a dead dood, so maybe Richard E. in honor of jettisoning the gold standard.

tiwimon's picture

Nah, just more 1's and 0's


With one push of a button, money is created now behind the scenes - who really thinks its not happening? The unFED just creating entries to backdoor bail out everyone that matters (a clue here - it isn't you, I or any Joe 6 Pack)

/In Binary we Trust... 

Boston's picture

I keep thinking about Japan, and what analysts said when Japan's public debt to GDP first crossed 100%, then 150%, etc.

Yes they sell 95% of their debt to themselves, But we have the reserve currency and the military muscle to force everyone in the world to use it. 

So I'm afraid that this Ponzi could baffle everyone and keep growing larger (and for a longer time) than would otherwise make sense.


kito's picture

we do not have the military muscle to force china and russia and india to use our currency. we dont have the military muscle to even force south american countries to use it anymore. these countries, little by little, are already letting go of the dollar.....what starts off a as a few drops quickly grows into an ocean....................

Outlaw Of The Wasteland's picture

central planning FAIL

londonistan et dc delenda sunt


xtop23's picture

Short answer - Get your money out of the system into real assets and have an escape plan -

Buzzworthy's picture

Three years to $20T?  We're there already.  The current federal debt as generally stated does not include $7T for Fannie and Freddie.  Add this to the current $15.5T and the FG is already underwater by $22.5T.  Of course this is dwarfed by the additional tens of trillions of dollars promised to future generations in SS and Medicare/Medicaid, but who's counting?

JustObserving's picture

Unfunded liabilities are $118 trillion and growing at $6.63 trillion a year.

InconvenientCounterParty's picture

It's not my fault, we must default.

Please join me in wiping out collectivism in all it's forms.

-Ron Paul

azzhatter's picture

in the immortal words of johnny cochrane- If the debts too big just take a swig.  Bennies got a plan, it's called shit hits the fan

NotApplicable's picture

If the debt don't fit,

take another hit!

Caggge's picture

For the US to not massively fail,

Corzine must go to jail!

francis_sawyer's picture

All we have going for us is a printing press...

SheepDog-One's picture

And everyone is real tired of that already.

viahj's picture

Carl Spackler: So we finish the eighteenth and he's gonna stiff me. And I say, "Hey, Lama, hey, how about a little something, you know, for the effort, you know." And he says, "Oh, uh, there won't be any money, but when you die, on your deathbed, you will receive total consciousness." So I got that goin' for me, which is nice.

q99x2's picture

Bring out the terrible towel. We've got Pittsburgh in the house.

This sounds great. Finally a solution. The Federal Government is Bankrupt. Bring them in under State Bankruptcy Laws. They are a corporation and they no longer meet State Law. Arrest the Bernank if he so much as steps one foot outside of DC.

Sophist Economicus's picture

Don't forget to bring an extra set of cuffs for Timmy

Hell, let's just bring in a cattle car and load all of congress and the Big O in there and be done with it.