Monday, November 10, 2008

An Open Letter to President-Elect Obama: The U.S. "Family Budget" and a Nation of Debt-Serfs

Dear President-Elect Obama:

Before we get down to business, let me observe that I lived just around the corner from you (on Clark Street) during the first years you attended our alma mater, Punahou School; I was working my way through the University of Hawaii at the time. I lived literally in the shadow of your apartment building. Do you recall a skinny red-haired kid with a battered VW Beetle? Probably not....

OK, on to business. Mr. President-Elect, perhaps the best way to understand the nation's grave predicament is to look at the American people as a family and the U.S. economy as the "family budget." This simple analogy may lack the appeal of high-powered academic models, but it does provide a remarkably easy-to-grasp clarity into the core problem you and your administration must face: the family budget is completely busted by a shattering, unprecedented excess of debt.
Put another way: to get our national "family budget" in perspective, just take an average over-indebted, underwater, maxed-out-credit-cards-at 21%-interest American family and add 10 zeros to their monthly shortfall.

Borrowing trillions of dollars to "get through this rough patch" does not address the core problem--over-indebtedness at every level and every stitch of the American economy--it actually exacerbates it by adding trillions in debt to the Federal government, which is already paying some $270 billion in interest on externally owned (i.e. not owed to the Social Security Trust Fund) existing debt this year.

Transferring private debt to the Federal ledger resolves nothing, and borrowing money to bail out irresponsible lenders and give debt-serfs slightly reduced mortgage payments will only set the day of reckoning off for an all too brief period.

The essential reality you and your team must grasp is that the entire era of low-interest, credit-bubble "prosperity" was a fundamentally bogus "prosperity". Mr. President-Elect, the sad reality is that as a "family" we have been borrowing about 10% of our entire GDP for years; it's as if the family budget was running a 10% shortfall/deficit which was "filled" each month with borrowed money.

If we consider the U.S. economy our "family budget," some $1.4 trillion dollars has been borrowed every year to cover the shortfall between earnings and spending. The truth is that every year of the "boom," American homeowners (or shall we stop being coy and say the truth, mortgage-holders) extracted $700-800 billion in real estate equity, and then added $300 billion or so to their credit card balances. Corporations and businesses also piled up astounding debt during this bogus prosperity, too, as did the Federal government.

Here is a chart which illustrates the exponential growth of debt in the era of bogus prosperity:

Please go to to view the charts.

The spike to the left in this chart is the Great Depression. As you can see, Mr. President-Elect, our current indebtedness makes the Great Depression excesses look like a mere amateur's warmup to the endgame we now face.

Mr. President-Elect, adjusted for inflation, our "family debts" should have risen no more than 43% from 1993 to 2007. Yet they rose an astonishing 300%:

Please note all debts tripled: mortgages, consumer credit (credit cards, auto loans, etc.) and total domestic debt, which of course does not include the Federal government's own $10 trillion in debt.

Mr. President-Elect, the reality is we are a nation of debt-serfs, unable to pay off our astounding debts and future obligations. Saddling our children with another $1 trillion in additional Federal debt every year will only bring the insolvency of our "family" closer.

The interest on the National Debt is a hidden tax, one which is about to grow by leaps and bounds to previously unimaginable heights. Thanks to budgetary legerdemain, there is confusion about the interest paid on the Federal debt. Allow me to explain: the Social Security system generates surpluses which the Federal government "borrows" and promptly spends, logging the debt as an internal one "we owe to ourselves."

Nice, but we also have so-called "external debt" which is the interest paid on Treasuries held by foreign and U.S. holders. Foreign entities currently hold some $2.7 trillion in Federal debt and trillions more in state/local government bonds, private mortgage-backed securities, corporate bonds and other debt.

As I have exhaustively documented over the years (please see The Price of Debt-Based "Prosperity": Slow Erosion, Inevitable Decline (August 27, 2008) Real Estate Bust: The Exhaustion of Debt (June 26, 2006) The U.S.A.: The Third World's First Superpower (April 16, 2008) , the interest on all this debt is growing rapidly.

For instance, just the interest on external Federal debt has risen from "only" $205 billion in 2005 to over $300 Billion for fiscal year 2009.

Those hundreds of billions are funds which cannot be spent on programs the "family" wants and needs. The U.S. is like a family so heavily indebted that they're borrowing more just to pay the interest on existing debt. Down that path lies insolvency.

Mr. President-Elect, this fast-rising interest is a stealth tax on our national "family." "Family members" are blind to its pernicious effects because it doesn't seem to affect their lives yet; their Social Security checks are arriving on time, their Medicare bills are being paid, and so they literally "don't care" about the interest which, like a tsunami, is building just beyond the horizon.
Mr. President-Elect, please don't scoff when I tell you the interest on our fast-rising debt will soon exceed the Pentagon budget. Only Medicare will be larger than the interest payments--much of which flows overseas, money which is not spent domestically.

You must understand this is not a "rough patch" which Keynsian "stimulus" spending will "fix"; we as a "family" have saved little, choosing instead to borrow and spend profligately. But borrowing isn't "free;" every trillion we borrow to bail out the banks, debt-serfs whose homes are worth less than their mortgages, auto companies, insurance companies, state and local governments--is there an end to this list?--incurs $40 billion more in interest each and every year for the life of the Republic--or until we declare bankruptcy and renege on our "family" debts. (And if interest rates rise, then that number could easily double to $80 billion a year for each $1 trillion we borrow.)

Mr. President-Elect, allow me to introduce you to a group which has not been seen in a long time: the Bond Vigilantes. The Vigilantes once demanded risk and return be balanced, and they raised interest rates as risk rose. During the credit bubble era, the Vigilantes disappeared; dead drunk under the punch table, gagged and stuffed in the closet, take your pick, but they have recovered their senses and are about to push global interest rates up.

Yes, the rates which were supposed to "stay low forever."

Mr. President-Elect, please note that China has announced it's going to spend $586 billion on its own economy, China Sets Big Stimulus Plan In Bid to Jump-Start Growth, which means the Chinese will have $500 billion less to spend buying U.S Treasuries. You may also have noted oil has fallen 60% per barrel, which means our Gulf oil exporting allies will have considerably less money to invest in our Treasuries, too.

With the biggest buyers of our debt sidelined by the global recession, then who is going to step up and buy the trillions in new debt being borrowed for bailouts and government deficit spending? The moment the Treasury can't sell hundreds of billions of new and rolling-over Treasuries at auction is the moment rates start climbing--and I can assure you that moment is not far off.

The sad truth is that there isn't enough money in the entire Universe to bail out our debt-serf "family." This isn't a "rough patch we need to get through," Mr. President-Elect, it is a culmination of an orgy of debt slamming into the demographic brick wall of 60 million Baby Boomers retiring and all expecting/demanding staggeringly unaffordable pension and Medicare benefits.

Simply put, Mr. President-Elect, Keynsian stimulus (a.k.a. "borrow and spend" deficits) has been the order of the day for a generation. There is nothing left to stimulate except our fast-growing interest payments to non-U.S. entities. We are truly a nation of debt-serfs, and denial will only work for 2009 at best. After that, cold reality will infringe on our fantasy world of "let's just borrow another trillion or two, it's just like free money."

Borrowed money is never free, and the money you spend paying interest is money you can't invest in productive assets. You are literally enriching the debt owners and impoverishing yourself.

There is only one solution to the debt-serf "family budget": reduce spending, reduce debt, stop borrowing more and start investing savings in productive assets rather than squandering borrowed money on a super-leveraged, risk-drunk "financial system," failed insurance companies, etc.

These realities are not popular, Mr. President-Elect, but the sooner the American "family" gets splashed with the cold water of their impending financial ruin, the sooner they can adjust to that reality and a balanced "family budget" which doesn't shift the burdens of our excesses onto future generations.

Will it be painful? Most assuredly; but then national insolvency will be painful, too.

Please feel free to send this to President-Elect Obama at, the Office of the President-Elect.

New essay by Chris Sullins: "The Good Life", a thought-provoking mediation on hunting, living off the land, resource depletion, delusion, weaponry, war and much more--highly recommended.

Thank you, Rodney M. ($10) for your most welcome generous donation to this site. I am greatly honored by your support and readership.

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