By Bill Wilson – As America celebrates its 235th birthday this July, citizens are increasingly becoming aware of a new danger to the nation’s independence and sovereignty. It was identified as the number one threat to our national security by Chairman of the Joint Chiefs of Staff, Admiral Mike Mullen.
It is the skyrocketing $14.3 trillion national debt.
It is why in poll after poll a majority of Americans oppose raising the debt ceiling without significant spending cuts attached. They understand intuitively that once a nation’s debt gets so large that it couldn’t possibly be paid back if it had to be, that nation is effectively bankrupt.
That is the tipping point where default and restructuring of the debt becomes the only viable option, the only path to salvation. Sadly, the U.S. is rapidly approaching this position.
Could the debt ever be paid?
Currently, the U.S. is paying about 3 percent interest on the $14.3 trillion debt, or $430 billion of gross interest payments every year. If we had to repay everything over the next 30 years, principal and interest owed would amount to $908 billion out of revenue every year. That’s 41.7 percent of this year’s $2.174 trillion projected tax collections.
Is that affordable? Would repayment even be possible today? Perhaps just barely. The benchmark total debt service ratio for mortgage lenders is 40 percent. Anything above that, and a prospective borrower would not qualify for a loan. So even today, Uncle Sam would not qualify for a home mortgage.
What is clear is that by this analysis, over time repayment becomes increasingly improbable, if not impossible. By the government’s own numbers, the debt service ratio will continue to rise this decade. Even under the rosiest scenario, America will be broke within the next 10 years.
By 2021, when the debt rises to $26.346 trillion according to the Office of Management and Budget (OMB), that office projects interest rates will have returned to their historical norm of 5 percent. Then annual gross interest payments will be $1.317 trillion. If we attempted to begin repayment then, principal and interest owed would amount to $2.195 trillion, or 45.5 percent of the projected $4.820 trillion in tax receipts projected for that year.
OMB projects a return to robust economic growth every year and tax collections more than doubling by the end of this decade.
But those expected tax receipts and growth numbers may be delusional. In 2000, tax receipts totaled $2.025 trillion. Now, they’re only $2.174 trillion. In 11 years, annual collections have only increased $149 billion, breaking a long string of decades where revenues had doubled like clockwork.
If OMB is wrong, and tax receipts only rise to, say, $3 trillion annually, principal and interest owed on the debt if it had to be paid back would amount to 73.1 percent of tax revenue. That would put the debt into the “couldn’t possibly be paid back” territory.
Yet, if the economy fails to grow rapidly or if Congress fails to balance the budget immediately, that is exactly where we will be. At that point, default would be the only honest option. European debtor slaves like Greece and Ireland are in the same situation, where their only hope is robust economic growth and courageous political leadership that simply is nowhere to be found.
By then, with principal and interest owed so high, you would scarcely be able to find anybody who actually believes the debt could ever be paid back.
Monetize the debt, perhaps?
So, how does the government expect to meet a total debt service ratio if it had to be paid of 41.7 percent potentially rising to over 70 percent by the end of this decade?
Right now, we are meeting our obligations by simply printing money. In 2009, reports Pimco, the Federal Reserve bought 80 percent of U.S. treasuries, and in 2010, it bought 70 percent through its various quantitative easing programs.
As a result, the Fed already owns $1.6 trillion of treasuries, more than 11 percent of the debt. It has a $914 billion cushion of mortgage-backed securities (MBS) it acquired in the financial crisis, which as it sells, will be replaced by more treasuries.
At best, with its current programs, the Fed can max out to about a $2.5 trillion share of the national debt. After that, it would have to go on another money-printing binge to enable the U.S. to keep borrowing at the pace it is expected to over the next 10 years.
But MSN Money’s Jim Jubak along with other market analysts do not expect to see a QE3 from the Fed. At least, not now. Jubak writes, “The Federal Reserve isn’t about to take on the financial and political risks of adding a half-trillion or so to its balance sheet, which has climbed to $2.84 trillion as a result of the central bank’s battle against the effects of the global financial crisis.”
Risk-free debt?
So, if not the Fed, who will buy the debt after the central bank has exhausted all of its options? Jubak ominously notes, “The answer, investors fear, is no one.” But, Jubak reports new international bank rules, dubbed Basel III, require banks to increase their core capital reserves from 4 to 7 percent may provide the mechanism. How?
Because under those same regulations, Jubak explains, sovereign debt will count as capital: “government debt securities will remain, as traditionally, risk-free,” meaning that “a bank that holds sovereign debt won’t be required to adjust its core capital ratio higher to make up for any extra risk.”
So, in response to the new requirements, banks will likely boost their capital ratios with sovereign debt. But is anyone supposed to believe that a bank that is sitting on, say, billions of Irish and Greek debt, is adequately capitalized? Would you feel safe and “risk free” if your local bank was stuffed to the gills with Greek or Irish or Bolivian government bonds? Considering the problems we face, are U.S. treasuries really “risk-free?”
The prevailing wisdom is that sovereign debt is indeed risk-free, most recently underscored by U.S. Treasury Secretary Timothy Geithner who said, “This country will never default on its obligations.” But this is a dangerous concept, similar to the belief in the 2000’s that the value of housing in the U.S. would continue to rise year on end.
S&P has already downgraded its outlook on U.S. debt from stable to negative, substantially increasing the likelihood of a full downgrade in the next two to three years. Moody’s has threatened to do the same.
If sovereign debt really is risk-free, why are government bonds even assigned ratings? Why do lenders assess higher interest rates on some sovereign debt and not others?
The answer is because sovereign debt is indeed risky.
How risky?
Iceland averted a sovereign debt crisis in 2008 by refusing to bail out its banks that had bet poorly on housing. If only other nations had taken this route. Ireland, which did bail out its banks, and Greece, which attempted to create a utopian welfare state, are so indebted they are at the heart of the European sovereign debt crisis.
And as they are quickly learning they would be better off defaulting. They’re just not allowed to.
When Enda Kenny was propelled into the office Prime Minister of Ireland, it was largely on the promise of restructuring Irish debt. But when the International Monetary Fund (IMF) proposed in May that unsecured bondholders of Irish debt take losses on their holdings, it was vetoed by U.S. Treasury Secretary Geithner.
Similarly, when Germany proposed that holders of Greek debt take losses, it was overruled by the European Central Bank (ECB). But why?
There is no way these countries could possibly pay back these debts if they had to. They cannot even service their debts via the bond market, and only now are meeting their obligations with bailout loans from the ECB, IMF and European Union. Therefore, the only equitable solution is to declare bankruptcy.
But that would mean that several international banking and financial institutions that bet poorly on sovereign debt would lose everything in the process. If German and French banks took losses on Greek or Irish debt, they would be unable to continue lending to the Italian, Portuguese and even Spanish governments, leading to more defaults.
This would have further ripple effects in the U.S. as Bank of America, Goldman Sachs, AIG and others are said to have insured Greek and Irish debt against default. If all these financial institutions were adequately capitalized, they could afford to take losses. Geithner’s role in preventing an Irish restructuring is all the evidence one needs to know they are not.
So, really, these are not bailouts of Greece, Ireland or Portugal at all. They really are bailouts of Greece, Ireland and Portugal’s creditors—large international banks. And therein lies the danger.
The existential threat to independence
These financial institutions, whether central banks or investment houses, are using all of the instrumentalities of the state and markets to prop themselves up from a catastrophic default. To survive, these institutions require countries to go deeper and deeper into debt every year.
In short, they have to keep this useless paper trade going. But in the end, it is unsustainable, another economic bubble, except one from which there is no fallback position. So, the banks’ only solution is to subvert sovereignty and to take over whole nations’ finances, as is happening in Greece and Ireland now, and ensure that the debt they are holding can be rolled over by central banks. Any concept of representative government is a cruel joke under these conditions. It really doesn’t matter who the Greeks or Irish elect, the banks are calling the shots.
Iceland remains the exception to the rule, and is the only nation known to have broken free from the stranglehold these international banks and other institutions have on sovereign decision-making. They, at least presently, have secured their independence.
If the American people wish to keep their freedom, independence and sovereignty, they must confront this existential danger. Our nation is rapidly approaching the point where the debt could never possibly be paid back. We are already at the cliff, the point of no return.
Representatives in Congress cannot allow the debt to get much larger. Either, Congress finds a way to balance the budget immediately and begin to pay down the debt, or else we face an inevitable, catastrophic default with our domestic fiscal policies being determined by our creditors.
There is no middle ground here. And no less than the independence upon which this nation was founded is at stake. It will determine whether future generations have anything at all to celebrate on July 4th.
Bill Wilson is the President of Americans for Limited Government. You can follow Bill on Twitter at @BillWilsonALG.
