posted on Apr, 8 2007 @ 12:20 PM
On The Federal Debt
Concern is often raised over the consequences to the United States should any foreign debt-holder “dump” their bonds on the world market in
retaliation to or disagreement with US policies.
Number 1 debt holder Japan ($649 b.) holds 2X debt as much as China ($354 b.) and number 3 in foreign debt holders is the UK ($249 b.) OPEC, our
nemesis in the 1973 oil embargo era - oil prices rose 8X - collectively holds a mere $102 b. which is less than 1% of our debt. Therefore, OPEC’s
holdings are negligible as we say in high finance. Even China holds but 4%. In and of itself an insignificant amount.
Q. Why do foreigners buy US debt?
A. Because the US has the largest GDP, it’s the world's safest large county - despite the Nine Eleven Event anomaly - it has a stable government
and can boast the reputation of never having defaulted on its debt. Because the US dollar is still the world's currency and holds about 400 million
ounces of gold. Say you are a rich guy in Nepal, Taiwan or Uruguay, with a couple hundred million laying around, where can you “stash” your nest
egg knowing that if the sun rises, your money is safe? Right. The US of A. Or, do you know anyone rushing out to buy Rhwanda or Cuban bonds?
Q. Is China an economic threat to the United States?
A. No. In a nutshell. the PRC and USA are symbiotic. We need each other.
Q. Who holds the largest part of the US debt? 34.5%.
A. The Trust Funds.
A trust fund is an old idea that once had great appeal but now seems to be more a liability than a once expected asset. The first trust fund came in
1920s, when the first Federal highway construction program was launched. A 1 cent a gallon gasoline tax was levied. The money collected was by law
dedicated to highway construction. A “trust fund” was created to hold the money until it was needed. In 1935, the Social Security Act was passed
and a trust fund established. In 1965, Medicare was created and a trust fund was also set up. I have not listed all the trust funds but you can go to
firstgov.gov to check them out.
But alas, times change. In the 1960s, the Congress approved the president’s idea to drop the dual bookkeeping system and to merge all Federal
accounts into one “Consolidated Budget.” There were and are sound theoretical reasons for this method of bookkeeping. It is not easy to explain
and not directly relevant here.
The problem with the consolidated budget is the excess funds collected by the FICA - Federal Insurance Contributions Act - are counted as revenue to
the Treasury when in fact, the money is dedicated to go into either the Social Security Trust Fund or the Medicare Trust Fund. Instead the money is
spent as it comes in, and (interst bearing) IOUs are given to the Trust Funds. $3,008 b. worth.
A chart in “A Citizen’s Guide to The Federal Budget, FY 2001" at p. 7, shows the following sources of Federal revenues: individual income tax,
48%; excise taxes 4%; corporate taxes, 10%; other, 4%; AND social insurance, 34%! (Obtainable from the GPO at Boulder CO, for $1).
Comment. This means that the Federal budget will not be in the “black” by June, 2008, because that projection depends on FICA taxes which are
already spent, if you see my point with trust funds. Whatever the amount of FICA is, and I don’t know it for 2007, that must be added to and NOT
subtracted from the shortfall in Federal revenues. We are doing just what the conservative critics of the Consolidated Budget Act said we'd do. Count
money already obligated as revenue. Example: Assume the 2008 budget is $3 t. Assume the FICA revenue is $700 b. Instead of “balancing” the budget
as promised - income equals outgo - the budget is actually short by the FICA amount, $700 b.
The numbers furnished by Edsinger in his opening post show the total of trust fund obligations to be $3,008 b. In addition, banks are required to keep
a ceratin percentage of their reserves in US Treasury paper, and this totaled $786 b. Owed but not payable. It does OTOH, earn interest which is
payable. Every government -Dem and GOP - has “used” the Trust Fund monies to offset the discretionary part of the budget, and other entitlement
programs. The 2 major components of the discretionary part of the budget are the Department of Defense and the Interest on the National Debt.
The Trust Funds are all in the black in 2007. This means all the Federal debts incurred since Ronnie Reagan went on a spending spree coupled with tax
cuts - and repeated by Bush43 - are due at least 50% to the excesses in defense spending - buy now, pay later. To get the total cost of “defense”
today, you must add half the interest on nation debt - about $200 b. - to the $455 defense budget, plus the $100 b. supplemental, plus the $34 b. for
the VA which we have now learned thanks to the WPost and Not the WH, is about 50% underfunded, so add another $17 b. Yet another "Hey, you're doing
a heck of a job Brownie!" That's known as "hands-off" management.
That puts the real US defense spending close to $806 b. this year! And unlikely to get smaller if we keep ourselves in the same War on Terror mode set
for us by Bush43.
[edit on 4/8/2007 by donwhite]