http://www.zerohedge.com/news/2013-01-05/guest-post-us-debt-crisis-how-high-will-it-go



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.

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.

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 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.

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.

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.

UPDATE 2-Fed's Plosser sees lasting blow to potential growth rate

SAN DIEGO, Jan 4 (Reuters) - The United States economy likely suffered a lasting decline in its trend potential growth rate as a result of the severe 2007-2009 U.S. recession, a top official of the Federal Reserve said on Friday.

"Any of you who have looked at the data of the most recent ... recession, it certainly looks like we've had a permanent shock," Charles Plosser, president of the Philadelphia Federal Reserve Bank, told a panel at the annual meeting of the American Economic Association. "The problem is we won't know the answer to that for many years to come."

Fed Chairman Ben Bernanke also recently voiced the possibility that the harm done by the recession might have trimmed the United States' growth potential, which gauges how fast the economy can grow over time without hitting inflationary speed bumps.

Plosser is one of the more hawkish members of the Fed's policy-setting committee and has warned about the inflation risks posed by the U.S. central bank's current aggressive policy to spur the country's growth.

Hawks warn a decline in the rate of U.S. trend potential growth means the Fed ought be careful in trying to push the economy to grow much faster, although some economists say that the dip may only be temporary.

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.

http://www.bloomberg.com/news/2012-08-08/blink-u-s-debt-just-grew-by-11-...

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.

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."

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".

Just as it said in the article: war is necessary to justify new taxes and new expansions of power. This is why the PATRIOT Act came out of nowhere right after 9/11, and this is why "gun control" is brought up every time there is a mass shooting. People are often unwilling to give up their freedoms under normal circumstances, but people become much more willing when there is an "emergency." War also places into minds the idea of patriotic self sacrifice; after all, if you are willing to give your life for your country, why not pay taxes or give up a little freedom to help win the war? At the end of the war, the taxes and expansions of power are kept, and so freedom is eaten incrementally.

As a researcher, I recently had the opportunity to go to a conference in DC, and at said conference there was a workshop I attended called "Fostering social acceptance of technology." The goal outlined in said talk is to achieve something I would call "scientific management," in which all questions about ethics and daily life are made by university professors and individuals. There were no objections from any of the professors present, and it was clear that all the ethics professors do is invent justifications. A few students like myself balked at the idea, but I couldn't help but admit that there is no real academic defense against tyranny in our university system.

The Soviets never learned their lesson in Afghanistan. The slow, relentless, senseless carnage of that war did much to tarnish the image of the Red Army, which was until then still regarded as the people’s champion for defeating Hitler and for standing up to the Americans. It took the disaster of the two campaigns in Chechnya after the Soviet collapse for the message to finally sink in. Russia eventually got Chechnya under control, through political rather than military means.

A military effort alone can never defeat a popular insurgency. The insurgents never have to win, they just have to continue to fight. In fighting them, the military is forced to fight the people of the country, and by perpetuating a state of war it continually thwarts its stated purpose, which is to establish peace. There is no room for victory in this scenario, but only for an ever-widening spiral of murder, hatred and shame.

US should make a deal with china and cancel the debt.