American Debt

America is in debt. So in debt that Congress had to raise what they call the Debt Ceiling, which is the statutory limit on Federal debt. The idea of enshrining a maximum permissable debt ceiling in law, was to set a limit and force any administration to keep debts down.

It didn’t work. All that happens is when the debt crashes through the ceiling, Congress is forced to raise the ceiling. It is raised it again recently from 13.5 to 14.5 Trillion dollars. By the way this total does NOT include the 1.5 Trillion of Fannie and Freddie debt. Nor what are called the ‘unfunded obligations’ such as pensions and medical care.

Presently this debt is about 60% of US GDP. It is set to increase to 100% of GDP by 2012 or soon thereafter. In other nations such a debt load would be a worry. But the US is big and the ratings agencies wouldn’t dare cut America’s rating. Treasury Secretary Mr Geithner even said in February that the US ‘would never loose’ its AAA rating.

Which makes it amusing that, as if to prick this conceit, China recently set up its own rating agency called Dagong International Rating Company (Dagong means Big Justice in Chinese) which prompty cut the US rating from AAA down to AA with a negative outlook.

Anyway with so much debt around I thought we should look at who its owed to. Just to clear up any confusion.

The US owes half of its debt to itself. The Federal Reserve has bought a lot of it. Much of the recent buying is essentially printing, or QE as we coyly call it in the UK. Something about the word ‘easing’ in this context sounds distincly slimey and unpleasant. Anyway, passing on. Some of the debt it sold to itself has been bought by other US govenment organizations.

And this is separate from the Federal debt bought by the States and local governments. Who have also bought quite a lot.But most of those States and local governements are bankrupt, however, and owe the Fed quite a lot of money. Which of course it ultimately owes to the Treasury. Who will eventually get it from the People, just as soon as they can find a job and start earning again.

So internally the Federal government (Treasury) has a great deal of debt some of it owed to bankrupt States and much more held by the Fed. Actually the Fed printed it up for the Treasuery. and sold it to the Big banks, who help sell it to other people. Most of whom are also bankrupt. And so, by the way are the Big Banks. They owe the govenment quite a lot also. But we’ll come to that later.

So that’s clear then.

Now another 28% is owed to foreign governments. Principal among whom are China and Japan. China is also owed a tillion or so by Fannnie and Freddie who sold them mortgage backed securities. Which has turned out to be a bit of an embarrasment for all concerned. Because the Chinese didn’t bother to read what was clearly printed on the front of the paper they were purchasing. Namely that F&F Securuties do NOT come with the full faith and backing of the US government. F&F were supposed to be arm’s length companies. Now whether the CHinese didn’t read the not-so-fine print or did, it all got horribly embarrasing because the Chinese felt no matter what it said on the contract they were robbed by F&F selling them outlandishly and fraudulently rated securities. Securities rated and ‘guaranteed AAA but actually utterly worthless. Which brings us back briefly to the ratings agencies again, Big Justice indeed!

So a couple of Trillion, of debt is held by a disgruntled customer. Of course they can’t sell in one go or they would not only crash the US but also lose their own money. So they are bound together in wanting to keep the lies going about US housing, mortgages, banks, and recovery.

Other nations own a bit. The UK has been buying it like it was going out of fashion even though the UK is itself broke and desperate to sell its own debt. Various European nations own more US debt than they themselves are worth on a yearly GDP basis.

Around $700 billion of US debt has been bought by the Japanese government. Purchased using money from selling their own debt to the Japanese people. Good savers the Japanese. Not sure they realize what their government has spent all their savings on, though. They could get miffed if the US were to deafult and they found out their savings were gone..That’s not going to happen of course Tim Gethner and Bernanke are making sure of that. By printing up more debt!

It’s not alll good though.

All this debt does cost a bit. Last year interst payments on US debt were 381 Billion dollars. More than a billion dollars a day. In the old days the US was more like Japan, in that most of its debt was owed to its own people and businesses. Today sadly as much as half of the total public debt (including F&F) is owned by foreigners and so those payment leave the US.

Leaving the US tax payer to try to pay ot all off. Which is going to be tough. Because the people, the ultimate source for paying off all the debts owed by everyone to everyone else, are in rather a lot of debt themselves. In the US, about 2.4 Trillion dollars in debt. And they appear to be sinking not swimming.

More than 10 percent of all U.S. mortgages had missed at least one payment during January to March this year. Foreclosures are at an all time high and increasing. 367,056 foreclosures filed in March alone, up nearly 19 percent from February. Nearly 258,000 homes in the US were repossessed by banks in the first quarter of 2010, up 35 percent from the first quarter of 2009.

All of which now means that for the first time in American. history, banks own a greater share of residential housing net worth than all individual Americans put together. Of those homes the banks don’t yet own, more than 24% of them were in negative equity (underwater) by the end of 2009.

Basically people owe the banks a lot of money. On the other hand the banks also owe the people. In the US, well over a Trillion and banks in the UK and in Europe owe similar amounts to the people there. Banks also owe a lot to each other and to their bond holders. Who are also owed a lot by nations and therefore the people in them. And NO ONE is sure who will get paid first or if anyone at all will get paid.

Oh and commerical property isn’t faring much better. 18 percent of all office space in the United States is sitting vacant.

Total all this up, shroud it in banking secrecy, add on top tens of trillions in long chains of CDS bets where it’s not clear who eventually will owe what to whom, and then remember this is the situation our governments and their banker advisors insist can ONLY be solved by issuing more debt.

Goooood Luck!