Sunday, December 28, 2008

US National Debt - A Time Bomb Ready to Explode?

National debt is the amount owed by a government to its creditors, both national and foreign. The total US federal debt today stands at around $10.6 trillion. The burden of this debt on each American citizen is close to $35,000. The debt has been increasing at a staggering avaerage of around $3.5 billion per day since September 2007. In October 2008, the National Debt Clock in New York that unofficially tracks federal deficit ran out of digits as the debt exceeded $10 trillion mark. The dollar sign was replaced by a digit as a temporary measure while the new clock is being prepared. The recent bailout package has increased the ceiling of federal debt to $11.3 trillion. Total US debt is currently around 73% of GDP. This does not include the guarantees backing up AIG policies or liabilities of healthcare and pensions. Nor does it include US private debt. National debt that exceeds 60% of GDP is not generally considered healthy. In 2007, around 61% of US public debt was held by non-resident foreign investors while that figure is now at 109%. According to an IMF study, countries that have more than 60% of their public debt held by non-resident investors run a high risk of debt default. More over, Barack Obama is expected to inherit a US budget deficit of $500 billion that might even climb to $1 trillion. This along with national debt and ongoing bailouts would make it very difficult for him to provide tax relief and public spending, as promised during the election campaign. This raises the question if the Obama dream for change will materialize?

Coming back to the the public debt issue, China and Japan are the number one and two ranked countries respectively that own most of the US debt. Both countries own more than $500 billion each. Next-in-line include United Kingdom, OPEC countries, Brazil, Luxemburg, Russia, Hong Kong, Norway, Switzerland, Germany, Taiwan, Korea and others. However, the biggest stakes remain with China, Japan and OPEC countries. Alhtough US can print as much currency as it wants and some experts believe the risk of insolvency might not be as great as it would have been in the case of any other country, as the situation deteriorates, there is high risk of hyperinflation and a drastic drop in US dollar. This in turn, would decrease the value of debt owned by foreign countries and in anticipation of such a fall, some of them might attempt to convert their foreign reserves into other currencies like Euro, which would again have negative effect on dollar. This in turn might lead to social crisis and chaos. China currently has interest in keeping a strong dollar but the future of dollar is quite uncertain. There are rumours that in the future United States might abandon dollar and adopt the currently theroretical "Amero", a joint currency of US, Canada and Mexico. However, it needs to be investigated how would it impact each of the participating countries, major current holders of US foreign exchange and the rest of the world. In short, the US national debt seems like a time bomb, ready to explode.


  1. So should we start accumulating the euro then? :-)

  2. lol. People might be going into the bullion market though.

  3. I think (though that is no assurance whatsoever) the Euro's got a lot of potential in the long-run. The dollar not so much.

    Gold? Naa! It has always only covered inflation.

  4. Yes, Euro has a better potential than dollar. However, gold has been used for a long time as a cover against risk. This is the real wealth that will always remain precious and limited unlike the pieces of paper we call curency that fluctuate all the time.