Usually, for us commoners, if we exceed our debt limitations or have the inability to pay-off our minimum interest coverage, we get slapped with a coke and a smile, along with the biggest stack of bankruptcy papers you ever seen. For the US government, it’s a little different. The debt ceiling expands as a function of GDP, which means that as GDP goes up, so does the debt ceiling. Currently, the debt ceiling has been raised from $12.394 trillion to $14.294 trillion on February 12, 2011, and we are soon to exceed it again (if we haven’t already). But what most of us want to know is simple: What factors elevate and, in this case, accelerate the increase in U.S. Treasury debt such that we continually exceed our leverage limits imposed by Congress?
A few factors affect the U.S. debt problems:
- Government POMO — The U.S. is allowed up to 200 Treasury bond auctions per fiscal year. Currently, the Permanent Open Market Operations (POMO) securities being purchased back from primary dealers, international banks, etc is the main way in which the U.S. “issues” new debt. Yup, you heard me… As the government buys back new debt from primary dealers, etc the government is essentially shrinking its balance sheet, however, because the U.S. government doesn’t have the “cash” to do so, it asks the Federal Reserve to print more money (yes, you heard me), and essentially extends an I.O.U. to the Federal Reserve. Think of it this way…if I buy back a loan for, say, $1000 at 1% interest, for another loan at $1000, you effectively did nothing. But imagine that $1000 loan was from your wife… Well, now, the liquidity of your family is down $1000 now, instead of $1000 later.
- Public Programs — Medicare, Social Security, Fixing roads, paying government social programs, etc. Self-explanatory because as the unemployment increases, both states and federal need to pay out more medicaid as well as unemployment. Furthermore, programs such as TARP have also increased government spending. Finally, retirement programs have increased government spending with baby boomers retiring, as well as mis-management of the existing programs.
- State Debts — As more and more states go bankrupt or have distressed assets, state lending lines from the federal government are tugged harder. California, alone, has borrowed over $10 billion from the US government since the start of the 2007 financial crisis.
Stay tuned for the next part to see how the continual rising of the debt ceiling affects the global, domestic and your personal portfolios…