The U.S. National Debt and You

The biggest concern of the average American nowadays is the economy. With the vote today on whether or not Obama will get the second half of the $700 billion released to pump into the economy, the main concern that pops into folks’ heads is how the hell are we supposed to recoup those funds for the tax payer? Keep in mind that we are at the tip of the iceberg on this trendy little bailout period we are experiencing. Next on the bailout list (drum roll please)……..California!! Yes, an entire state will get bailed out this year and no, I’m not kidding. I’m dead serious!
Anyway, what is the national debt? I’m not asking this question to insult your intelligence, however everyone has some idea, but do not have a grasp on it completely. For most of the people whom I have conversed with concerning this topic; they have no idea or only a partial understanding of what comprises the national debt.
The national debt is very simple to understand. It is made up of all the debt obligations of the government. So, if you own any government backed or government issued debt instrument (i.e.bond), then that is part of the national debt. The government pays you, the bond holder, the interest on the bond (if applicable) periodically and then at the time the bond matures, you get the face value (principal) of the bond. Many institutions, both domestic and foreign, own US issued debt instruments. The bond example is just one type of debt instrument, but I won’t bore you with all of the types of debt instruments. The funny thing about US investors who hold government issued bonds is that they interest payments and principal are paid back with tax dollars. Essentially, you are being paid back money you lent to the government with your own money, even if your share of the tax dollars being used is proportionally microscopic to the total.
This type of debt comprises about 60% of the total national debt. The other 40% comes from deficit spending. The total national debt is approximately $10.7 Trillion. It has increased about 60% since 2003 and has doubled since 2000. The biggest contributors to the national debt have been the wars in Iraq and Afghanistan ($900B) and deficit spending. Many ask the question, if there is always a budget deficit, how do we reduce or eliminate the $10.7 trillion bill. The answer is, we don’t.
Here’s the other issue, where is all this bailout money coming from? Is there some secret emergency fund that this money is stashed in? Nope, there are TARP funds and other agencies that have “authorized” funds in varying amounts. None of these agencies have actual money, just authorization to spend money. One of the cool things about the government is that when the time comes when approval is given to one of these agencies to use their “authorized” funds and there is no money, we simply print more. Pretty sweet! I need to get me one of those printing presses, so I can print some money when I run out. When this printing of money occurs, two things take place. First, I get pissed off and second, the value of the dollar goes into the toilet. The reason why this occurs is the basic rule of the more of something there is, the less the value of each individual unit.
A byproduct of the dollar’s value getting deep sixed is that inflation occurs. If this bailout trend continues and the government keeps pulling the handle on the money machine and yelling “ca-ching” with each pull, we could possibly see a scenario straight out of Brazil a few years back. Basically, the country decided to not pay back debts they owed to other countries and defaulted. The main reason is that their economy was so bad, they had to print money to keep it going. They printed so much money, the inflation rate was 5000% (that’s not a typo) and the Brazilian currency was effectively worthless. In order to stop the rate of inflation from increasing exponentially, they had to stop printing money, which meant they couldn’t meet their debt obligations. The problem with a country defaulting is that the creditors are people and institutions in other countries who are holding defaulted Brazilian bonds and other debt instruments. This creates a ripple effect throughout the planet. I doubt the U.S. is going to reach that point, but unless the trend changes, we’ll eventually reach that point. If the U.S. defaulted, then the world will have a meltdown and would never recover. Everyone would pretty much have to start over from scratch.
In closing, to give you an idea of how bad we are as a government and a country in terms of money management, I’ll leave you with the following stats:

Total US Currency in Circulation (worldwide)- Approximately $900 Billion
Total US Credit Card Debt- Approximately $14 Trillion

Source: I read it somewhere. I can’t remember where, though.

Next on tap, where to invest if you don’t like stocks.

As a side note, the next rap song about money or anything relating to the government should have an Obama look-a-like dressed in a rhinestone jumpsuit pulling on a huge handle and cranking out sheets of money with a big smile. That’s just the image I get in my head when the subject of government bailouts comes up.