9 April 2006

More Debt, not Less

Kitco Commentaries - They Have No Chioce - By Paul Van Eeden: "Maybe you don’t like to think that far into the future. Perhaps a trillion is just too big a number to comprehend, so let’s think about billions. During the past six months, since the beginning of the current fiscal year, the US government’s debt has increased by $456 billion. On an annualized basis that is $912 billion. The US government’s debt increases at the rate of $2.5 billion per day, including weekends. How much is a billion? A billion seconds ago it was 1974 and one billion minutes ago Jesus may still have been alive. Next time someone tosses the word “billion” or “trillion” around casually you should ask if they actually know how much it is.
It might be true that the US economy is very large, and many people believe the US economy is large enough to carry the humungous amount of US debt. Personally I believe that US economic growth is overstated but, even if we assume the official numbers are correct, then US economic growth is only about 2% to 3% per year. The US government’s debt is currently growing at an annualized rate of 11.5% and, as I explained earlier, that growth rate is about increase.
The amount, and the growth rate of US government debt, coupled with the possibility that China will have to reduce its purchases of US Treasuries to comply with the wishes of Washington, means that US interest rates could soar. Again, we are not talking about short-term rates here, but longer-term rates: The five-year rate on which auto financings are based, and the twenty and thirty-year rates on which mortgage rates are based. This is bound to hurt US consumers, corporations and the US economy and it will occur in conjunction with a weakening US dollar, which means higher gasoline prices.
A weaker dollar"

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