The Federal ‘Debt Bomb’ Set to Explode in our Near Future
The official national debt figure is widely trumpted as a bit over $14 trillion. If that were not bad enough the currenty historically-low effective interest rate on the debt service has come as a result of shifting more and more of the total debt to short-term maturities.
Noted economist David Malpass noted in a recent Forbes article that the average maturity on U.S. debt has dropped from 70 months in the 1980’s to less than 60 months today. More ominously, the Federal Reserve’s large buyback of longer-dated bonds has turned the effective maturity to under 40 months!
America now must roll over the entire national debt every three and quarter years making taxpayers the holders of what is essentially the largest ‘adjustable rate mortgage’ in the history of the world.
Any number of events could cause interest rates to surge sending our debt service costs quickly spiraling to unsustainable levels 5 – 15x what we are currently paying. This could crowd out virtually all other federal spending making today’s budget talk look like a joke compared to the problems we’ll face when this occurs. See the chart below for a preview of what a rise to only 30-year average rates would do to our debt service costs.
The percentage of our debt held by foreigners skyrocketed from 18% in 1989 to about 46% in 2010. Should China or Japan decide to stop, or simply cut back on their purchases of our debt, there will likely be a much larger spike in our interest rates and debt service costs than projected above.
Unfunded mandates for Social Security, Medicare and Medicaid dwarf the substantial debt that our leaders fess up to having incurred already. Immediate and substantial changes are needed if we are to avoid looking like Iceland, Greece or Ireland yet our president actually proposed a budget that would increase our deficits dramatically rather than doing what is hard and necessary.
Every dollar of illusory deficit reduction is scheduled to occur after the next presidential election- when the pain of the necessary austerity measures can’t hurt Obama’s chances for another four years of financial mismanagement.
Dr. Paul Price
www.BeatingBuffett.com www.OptionsProfits.com
Nothing like a down week to make people less optimistic.
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Penny stock Gateway Industries went from yesterday’s close of $0.01 to almost $3 intraday on the news that an early investor in American Idol - Robert Sillerman- had purchased controlling shares in a private transaction.
Volume as of 1:30 PM EST was about 1.33 million shares.
President Today’s Wall Street Journal reported that President Obama has included a huge deferred tax increase on businesses in his new budget proposal. It would add about $100 billion to the cost of doing business over the decade follwing implementation (starting in 2014).
This is the same president that claims he wants to freeze overall Federal spending while increasing Federal investment in things like education and infrastructure. The net effect of freezes and increases = increases!
President Obama has often mentioned cutting our corporate tax rates to make America more business friendly. Each time though he says he will do this by “closing corporate tax loopholes”.
Translation: Business will pay the same or more in total taxes but Washington will continue to redistribute the burden to suit its political whims.
He just doesn’t get that it’s only a true lessening of corporate tax rates (without offsetting increases) that can stimulate business and reinvigorate America.
It is certainly no a coincidence that both these huge business tax increases and the proposed implementaion of Obamacare are set to take effect AFTER the next presidential election is over.
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