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SOVEREIGN MAN

Some clear thinking on the debt

debt-crisis2

August 29, 2012
Rome, Italy

If you haven’t heard yet, the United States of America just hit $16 trillion in debt yesterday. On a gross, nominal basis, this makes the US, by far, the greatest debtor in the history of the world. 

It took the United States government over 200 years to accumulate its first trillion dollars of debt. It took only 286 days to accumulate the most recent trillion dollars of debt. 200 years vs. 286 days. This portends two key points: 

1. Anyone who thinks that inflation doesn’t exist is a complete idiot; 
2. To say that the trend is unsustainable is a massive understatement. 

At an average interest rate of 2.130%, Uncle Sam will shuffle $340 billion out the door just in interest payments this year… and it’s a number that’s only going up. To put it in context, China owns so much US debt that the INTEREST INCOME they receive from the Treasury Department is nearly enough to fund their entire military budget. 

It’s rather disgusting when you think about it. 

Yet when you look at the raw numbers, there is no sign of improvement anywhere on the horizon. Last year, the Treasury Department brought in about $2.3 trillion in tax revenue. They spent $2.9 trillion JUST on -mandatory- programs like Social Security and Medicare, plus the very sacrosanct defense budget. 

In other words, the US government was $600 billion dollars in the hole before paying a dime of interest on the debt, or paying the light bill at the White House. In fact the government’s own numbers reflect a budget deficit through the end of the decade, i.e. the debt level is only going to get higher. These are their own figures. 

In the 19th century, the Ottoman Empire was facing a similar debt crisis. In just 11-years, the Ottoman central government went from spending 17% of its tax revenue on interest payments, to spending over 52% of its tax revenue on interest payments. Then came default. Eleven years. The US is at 15% right now. How long will it take for the interest burden to become unbearable? 

History is full of examples of superpowers bucking under the weight of their debt. This is not the first time that it’s happened, and it won’t be the last. 

Sovereign debt is a giant confidence game. Investors buy bonds on the belief that governments can (and will) pay. When that confidence is chipped away, the cost of capital becomes debilitating. And people tend to notice a $16 trillion debt burden. 

This is banana republic stuff, plain and simple… and smart, thinking people ought to be planning on capital controls, wage and price controls, pension confiscation, and selective default. Because the next trillion will be here before you know it.

Our goal is simple: To help you achieve personal liberty and financial prosperity no matter what happens.

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Just think about this for a couple of minutes. What if the U.S. Dollar wasn’t the world’s reserve currency? Ponder that… what if…

Empires Rise, they peak, they decline, they collapse, this is the cycle of history.

This historical pattern has formed and is already underway in many parts of the world, including the United States.

Don’t be one of the millions of people who gets their savings, retirement, and investments wiped out.

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About the author: Simon Black is an international investor, entrepreneur, permanent traveler, free man, and founder of Sovereign Man. His free daily e-letter and crash course is about using the experiences from his life and travels to help you achieve more freedom.

Comments on this entry are closed.

  • A Patriot

    Ugh…nevermind. It showed up after I signed in. Doh!

  • John L

    Here’s the thing, Simon. The whole modern day financial system is a confidence game/scheme. What does 16 trillion dollars even mean? Its paper and pixels….I think its very difficult to say one economy is more sound than an another when they all play along in the same absurd game. If the U.S financial system comes down so will all the others like dominoes. World trade as we know it…gone. There maybe some kind of bartering system but anyone who’s taken basic economics knows that’s terribly inefficient. So the question is which countries will be better off in autarky(ie the absence of trade)? Ironically, the United States would be near the top of the list and Asia would probably be having daily food riots. There just aren’t too many countries that can domestically sustain themselves these days. Your planting flags ideology kind of steps over this….

    Respectfully,

    John

  • Anuar

    The real trade is when we trade the actual value of the items such as gold, silver or any valuable commodities. The trade should be on the actual value and not on some value that we purposely increase without any value added to it. This started to happen when people started charging interest on borrowed money where the is no value being added to it. That is why the scriptures from God prohibit interest bearing transactions.

  • http://twitter.com/KipDrordie Kip Drordie

    After trying to replicate your math on the segment about our interest debt covering China’s military costs, I can’t reproduce it. According to wiki, China owns $1.16T of our debt, down a few hundred billion from last year. At your interest rate of 2.13%, that’s $25B. China spent $143B last year on its military. Anyone care to help with my numbers?

    • kinus

      China owns about $1T of US debt, while spending about $150B in military. This $1T number hasn’t seen much change since 2010. The claim that “China owns so much US debt that the INTEREST INCOME they receive from the Treasury Department is nearly enough to fund their entire military budget.” is inaccurate and misleading. At sub-2% interests return on those debts, China will be lucky if they could fund more than 10% of their military budget. People don’t normally call a 90% shortfall “nearly enough”. lol.

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