Part III: America’s unprecedented debt

Published 7:00 am Friday, July 10, 2015

America celebrated its 239th birthday on July 4, 2015. Its debt has mushroomed to 18 trillion, 277 billion, and 773.6 million dollars (18.3 trillion dollars). The debt equates to $56,919 per person, and $154,336 per tax payer for Americans.
This Column concludes our discussion of America’s sovereign debt.
In summary, it seems that our leaders are victims of disastrous “normalcy bias” about generating debt. Psychologists use this term to explain the thought process that lulls people into thinking that something that has worked for so long, will continue as usual. All systems have a limit to their abilities to function, and abusive users gamble on the time of eruption.
Under the existing income and expense model of our legislative and executive branches of government, the U.S. Treasury is unable to pay the monthly interest on the debt. If there is a plan to retire the debt, I have seen nothing about it. While I have not verified this, Porter Stansberry of Stansberry Reserch reports that the monthly interest runs just over $1 billion per month. The Treasury sells new securities to pay the interest to securities holders, rolling over the interest due, into additional debt. Try that with your banker.
Recently, I received a Special Report from the Outsider Club entitled “The Debt Ceiling “Nightmare Scenario” Explained”. The Outsider Club is a financial news reporting company. Nick Hodge, its Founder and Managing Editor, is committed to providing financial news not covered by the mass media. Hodge spells out the possible nightmarish scenario of a government default, should the debt ceiling not be increased by late summer.
The debt ceiling passed last year authorized a suspension to the limit through March 15th, 2015. Treasury estimates it can keep the government running into October or November.
Therefore, the debt ceiling must be increased. Even though past experiences with this have been resolved at the 11th hour, still negative effects in the markets have occurred because of investor and consumer reactions. Congress has been distracted by other issues with Obamacare presenting the largest impact on progress.
Two effects are obvious with default. First, the government will stop sending out any form of payment, unless exceptions are made. Historically, military paychecks and such have been sent out. Social Security, disability, and national debt interest payment cannot all be made.
Secondly, Treasury cannot issue new securities to borrow new money once the debt ceiling is reached.
It is the secondary effects of these two items that are utterly catastrophic.
The credit crunch from the Lehman Brothers collapse of 2008 would appear overnight, along with the loss of credit worthiness and liquidity (available cash). These actions will put us on the brink of a worldwide system failure again.
Our European allies and the Pacific Rim countries are in the same boat with America; most possess sluggish economies. James Rickards, whom I recognized in earlier Columns, says we are in a New Depression that began in 2007.
Forty years ago, July 4th, 1975, I was invited to speak on America at the City Of Picayune’s celebration.
I would like to share my remarks made that day over the next three Columns.
We then will return to the economy discussion. Take heed of 2 Chronicles 7: 14.

By Aaron Russell Sr.

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