Federal Debt beginning to "go vertical"

In the magazine The Economist, they recently reported this interesting bit of news:

Federal Debt could go to 400% of GDP

On January 7th the Congressional Budget Office (CBO), a non-partisan outfit, released projections that show the financial crash and the resulting recession are already wreaking havoc with America’s finances. It reckons that the budget deficit will soar from $455 billion in fiscal 2008 (which ended last September 30th) to an astonishing $1.2 trillion in the current year. At 8.3% that would be the most as a share of gross domestic product since the second world war.

But the underlying picture is worse for several reasons. First, it does not include any estimate of the cost of Mr Obama’s planned fiscal stimulus, which he will seek from Congress soon after being inaugurated. Second, the CBO assumes all of George Bush’s tax cuts will expire as scheduled at the end of next year and that the Alternative Minimum Tax, a parallel levy aimed at the wealthy, is allowed to ensnare a growing share of the middle class each year.

One thing to understand about even the horrendous sounding “8.3% of GDP deficit” is that it is vastly understated. First, as they note in the article, not everything is being counted, such as the cost of the stimulus plan.

But second, even if such excluded costs were counted, it’s important to note that the way the government reports its fiscal condition would be illegal for any public company.

The US government uses a pure cash-based accounting, which simply measures money coming in and money going out, and the difference is reported as the deficit (or surplus in better days). But this ignores the extra Social Security surplus funds that are siphoned off.

The cash-basis accounting favored by the US government also ignores any accrued liabilities that might have resulted during the year, such as veteran benefits or federal retirement funding shortfalls. In your household, the equivalent would be simply looking at your checking account balance at the end of the year and calling that your net position while conveniently ignoring your outstanding credit card bills, mortgage, and auto loan payments.

Including these sorts of “oversights” for the US government would lead us to what is called accrual basis accounting. This is what is used by every major company and should be used as a more honest assessment of the United States’ true economic position.

Even here there are two ways to view the numbers. One would include just the pure accrual obligations, and the second would be to also include the accrued liabilities. The difference is that accrued obligations have to be met and repaid while liabilities can be modified and possibly reneged upon, meaning they might not ever be repaid at all. The two largest liabilities of the US government are Social Security and Medicare/caid.

On an accrual basis, most of the debt numbers have to be bumped up by some $400 to $500 billion, or 2% - 3% of GDP, making the problem much more severe than is currently being discussed.

Over the long term, the US government is insolvent, and the Economist article continues on to the punchline that the US is on track to achieve a debt load of 400% of GDP.

But the real problem is that the first baby-boomers retired last year. In coming decades, spending on entitlements—the three main ones being Social Security (pensions), Medicare (health care for the elderly), and Medicaid (health care for the poor)—will drive deficits and therefore debt, up sharply. But the CBO has previously said that, as America ages and if current policies continue, it could theoretically hit an otherworldly 400% by mid-century.

The problem with the CBO estimate is that by stating the US government could achieve a debt-to-GDP ratio of 400% by “mid-century,” (2050) the CBO is off by 41 years. The US federal government is already nearly at a 400% debt-to-GDP ratio, at least if the Treasury department is to be believed.

If we take the present Value of the net US financial position (which accounts for all accrual based shortfalls and liabilities), currently at negative $53 trillion according to the Treasury department, and divide that into the current GDP of $14 trillion, we get a debt-To-GDP ratio of 378%, which is close enough to 400% for government work.

No questions any longer surround the issue of US solvency – the nation is insolvent by any measure one cares to use. When that reality sinks into the Treasury debt markets, we will enter stage two of this financial crisis. For now, most seem content to continue with the illusion that all of our obligations, entitlements and promises can be funded through some combination of borrowing.

The question, then,, is how these mounting deficits will be financed. Over the past two weeks one of our largest creditors has been making ominous noises about curtailing their purchase of new US debt, as recently reported in the New York Times:

China Losing Taste for Debt From U.S.
HONG KONG — China has bought more than $1 trillion of American debt, but as the global downturn has intensified, Beijing is starting to keep more of its money at home, a move that could have painful effects for American borrowers.

The declining Chinese appetite for United States debt, apparent in a series of hints from Chinese policy makers over the last two weeks, with official statistics due for release in the next few days, comes at an inconvenient time.

If China, and possibly other nation states, back away from buying more US debt, at precisely the moment the US is seeking to borrow record amounts, we can reasonably expect a new and larger wave of financial stress to sweep across the global scene. The signatures of a failure of US debt auctions would be rising rates and a falling dollar.

Given that the most recent stimulus plans call for more than a trillion dollars of (cash-basis) shortfall in each of the next few years, this raises the troubling prospect that the US will have to fund much of this shortfall itself. This can only come from savings or new money printing.

Looking back on US savings patterns over the past 20 years, and considering the drain on earnings and savings that a deep recession can often mean to many bank accounts, I do not think the US is capable of self-financing this string of large federal debts.

This leaves printing.

I think this represents a probable source of future disappointment for those thinking that the recent Fed actions of monetizing debt and otherwise increasing the rate of creation of new, out of thin air money, will soon cease and even reverse due to an improving situation in the credit markets.

Again, I can come to few solid conclusions about where and how to protect oneself from this on coming shift in the value of the dollar (and, by extension, nearly all fiat currencies) besides removing ones money from the dollar based financial system itself. Gold, silver, oil, land, and other commodity plays.

When printing is the only option, inflation is the only outcome.

More on this later.


This is a companion discussion topic for the original entry at https://peakprosperity.com/federal-debt-beginning-to-go-vertical-2/


Apparently you aren’t the only one to see the handwriting on the wall.

The rich are also looking down the road as noted in my recently created forum thread: "Who’s Buying Gold"

Merrill Lynch says rich turning to gold bars for safety


Again, I can come to few solid conclusions about where and how to protect oneself from this on coming shift in the value of the dollar (and, by extension, nearly all fiat currencies) besides removing ones money from the dollar based financial system itself. Gold, silver, oil, land, and other commodity plays.[/quote]

I’m trying to get a better handle on all this so please allow a few questions.

CM (or anyone for that matter) please define "other commodity plays".

In the possible scenarios we’re imagining wouldn’t land prices remain stable or go down while gold prices would be going up or would land, gold, etc all go up in a similar fashion?

I had imagined relocating my family from the city to a place just outside a smaller town (something 5,000-10,000). I wanted a smallish homestead (8-12 acres) and had thought a rental would make sense until things settled down. I had imagined gold going up and land prices staying stable or even going down.

Am I off base here?

Why would anyone buy our debt at this point? I remember during the mid 80’s older folks being mad that the Japanese were buying everything. Did their over purchasing cause their stagnation? Seems to me the trend has gone global and America has already been sold! They own a lot of nothing here, and now they are stationary. What do we do when the collectors arrive?
I’m not an investor. Never had the money to bother. I took macroeconomics and statistics in college and they just made me mad, because, as opposed to the other math classes I was taking (calculus II and physics II), they just didn’t make sense when you can take the same information and make 20 answers out of it. Perhaps that is why this site has "rea"sonated with me the way it has. I think this is the great selling point of Chris’ work; that if an average person looks at it they can mostly understand it. This site is littered with intellectuals. I can tell from all the reading i’ve done the last 3 months, and although none of you know where things are going I truly appreciate all the wisdom you’ve imparted on me. I’m joe six-pack, maybe joe case. I just want my family to get by.
Everyones’ problems start with a failure of the foundation. The bottom of the pyramid (scheme) is crumbling and the eye is swaying. We may be able to shore it up though. I propose an across the board government budget cut to get below expected tax income minus +/- 5% (actually that % might be a little high!). All programs, all divisions; the two greedy sides of the coin can argue about what constitutes a section to be cut. Eliminate most of the IRS by instituting a fair flat tax. I realize the rich are for this because they pay disproportionately, and the middle class (what’s left of it) will get slammed. If you make 1.5 x min. wage… no taxes. Under the table and criminals already get away with it, and ‘if’ they file they get it all back anyway. Don’t bother with them. This would be a radical change, but there is no time like a ‘depression’ to do it. Pay off our debt. Let the world know that we are as good as our word was.
If my government was a household, everything would have been confiscated and it would be in debtors prison years ago. It’s no wonder that the avg joe doesn’t care, neither do our reps. It’s a thorough breakdown in honor. No ones word means anything anymore. All our leaders are for sale. The best thing that could happen to us is occurring right now. The destruction of money.

Sorry I had to rant, but I still mean it!

Good one, Joe!


uuhmm, wrong Bogart… i think

As I get ready to leave my happy home, I think that it would be wise of all of the readers and typists out there in Martensonland, to step back, think, and then not think (too much). I’m going to go buy (gasp) a beer and watch some live blues music! Let’s all invest in local artists and wide beer steins (so they catch all the tears). Best wishes to all, have fun! It’s an adventure!!!

Sandman: Your post is heartening and it’s good to hear the positive impact that this site is having on so many people.

I fully agree with the last item you mentioned about the destruction of money. As we have been seeing lately, we are in a (temporary) deflationary spiral. I am blessed to have no debt, a good education, and a good job. But still, I don’t think that things on main street are completely out of control. At least not yet. My point is that the deflation is very helpful for all of us, painful as it can be. Frankly, as long as you keep your job and sanity, it is nice to see lower prices. But even that is not enough to bring most of the consumers (or me) back in full force. So everyone is saving more and worrying more about the basics. That’s exactly what we need, right? Let’s see: Oil: big problem. Debt: big problem. Natural resources: big problem. Most of these can be best dealt with by a producing rather than consuming public. And they can best be addressed using the exact same type of mindset that deflation brings.

Like Peter Schiff, I believe that the deflation and recession should be embraced. It is the only necessary way for our economy and industries to restructure themselves back to more efficient and better targeted production. Unfortunately, the readjustment is painful, but anyone that believes the Democrats and Republicans have a better idea of how to restructure the economy than the free market does are smokin’ something.

I nearly puke everytime I hear the words "job creation." What political propaganda! Legitimate jobs can only be created as the productive capacity of the nation improves. The notion that jobs need to be handed out to people by the government absolutely disgusts me. And if all these new jobs are going back to reinflate the auto industry and the entertainment "industry" and the financial services "industry," it’s clear to me that we are not increasing productive capacity; we are simply inflating our currency.

The consumers need to stay out of the stores. And when the stores’ sales go down, perhaps their cashiers should realize that there are more productive ways for them to occupy their time. Again, let the market decide through the recession. Unfortunately, we will ultimately NOT be left with more food, oil, clothing, cars, etc. we will all be holding worthless FRNs. I suppose the printing industry will be one of the few that will expand.


Nice post Mike! Speaking of puking …the only thing I can see that you may have overlooked is the 5 billion that the porn industry is asking for. That will surely push our production over the top, especially if it can expand at the same rate as the printing industry!


Actually, the porn industry request was on my mind when I made the post, but I should have included it. Maybe if they get bailed out it will prevent some of the other related industries from failing.

Porn is an often ignored but very big industry in this country. But it’s failing for a reason. People eventually are realizing that food and oil are more important than entertainment.


I’d like to know what the "other commodity plays" are too. However, I suspect they mean to invest in things like basic materials, agri, oil, etc using ETFs like MOO, DBA, DBC, USO, to name a few. I’m kinda waiting for a big downtown in the market (which I think will happen in a month or two, then buy into those ETFs and hold waiting for inflation to kick in. when it does, those things will skyrocket.
Good Luck

Peter Schiff recommends getting out of the US Dollar because he says it’s going to become worthless in the near future, owning physical gold, silver, and land is fine but owning other commodities denominated in dollars is dangerous. I also don’t like owning paper anything in these unusual times, I am keeping my bank account with just enough money to pay the bills and buying essentials that I might be able to use or trade in the future.

I like Peter Schiff but I don’t agree with his use of the Perth Mint, I don’t trust the Australian Govt ever since they confiscated the countries firearms, I’m sure they would not hesitate to confiscate gold. Also the Perth Mint is having some problems with delays in delivery,


Schiff’s website is a good source of news and links,



I like the concept of James Turk’s GoldMoney.com in which you have an offshore bank account backed by gold and silver. I wouldn’t put all my eggs in one basket, but it’s a good way to diversify. You can easily convert dollars or gold to Euros or CHFs as well.

I don’t like the Perth Mint either. In my opinion, the only reason to keep assets offshore is to give you something to go to if you leave this country. If you are staying here, then I don’t see too much risk in keeping assets at home as long as you take measures to protect them.

I think Water and Agriculture will become huge issues down the road, but for me, they are difficult to call in the shorter term. Though depleting, fresh water supplies are somewhat predictable and gradual in their changes. They are all domestic and so water shocks don’t seem imminent. Agriculture is a little different because it is now entirely dependent on oil. And I’m not just talking about price. Suppose we end up in a gold back Saudi / Russia currency situation? Then we’re going to have further complications getting the oil. The US could just barely support its own agriculture with domestic oil. But just barely.

Hey, food and water are essential for life. Don’t get me wrong, I think you could do far far worse than investing in them.


I’m really confused by these different numbers.

8.3% of the GDP has to be a different number, or a different measure, than the 400% projection. 8.3 isn’t going to rise to 400… they’re talking about two different measures completely, right? And then most often the GDP ratio is reported as being 74.31… which must also be a different measure than the 400 and the 8.3.

What are the current numbers? On the 400% measure, what are we at currently, what were we at during the end of WWII, and how does this number compare to other countries (like Japan?).

Our current debt to GDP ratio is 74.31%, which is right about in the middle of the world compared to other countries’ ratios, and is down from the 120% or so we were at during the end of WWII. This measure must be different from the 400% number - I think when Chris reports the 400% number he is including all the kinds of debt that aren’t usually included, such as social security, medicare, and medicaid. It makes sense that they should be included because they are part of the debt. But that makes it hard to know where the US really stands because I can’t find any other countries who measure their ratio this way. I have no idea if we are still smack dab in the middle of the world or if we’re suddenly in the worsest position.

Does anyone have any links to other countries’ GDP to debt ratio for comparision, measured the way Chris is measuring it?

Question: Who is / would be buying U.S. treasuries if China or other such countries weren’t?

Question: Will the printing press (the fed) create a hyperinflationary state?

Answer: The powers that be are far more intelligent and have more knowledge at there disposal then any of us could possible. Hell, most information (government data in particular) is so damn manipulated, as pointed out above, or opinionated that one couldn’t possible have any solid answers. So here is my best shot. The first question is somewhat easy answer. The fed, our unlimited evil money machine, will simply print (with the click of a mouse) $1 billion dollars onto its balance sheet. The fed will then give/loan/transfer the $1 billion on its balance sheet to bank A; with the implicit understanding that bank A will use 750 million of the newly printed money to buy treasuries. The remaining 250 million can then be used as reserves (10 to 1) to loan out 2.5 billion to the public. No doubt some members of public will buy the remaining 250 million treasuries. The second question I can’t answer with certainty. As our use of paper as currenecy is completely based on faith. (I'm a history major at USF.) One thing Ive learned is that all fiat currencies have a timeline; they a beginning, a midde and an end (more on this for another time). However, that does not mean ours is coming to an end anytime soon. I do have an educated guess on the matter so here it goes. First, we are not the only country experiencing an economic crisis right now, just about the whole world is. Some worse then others, Iceland, Ireland, Equador, to name a few. Basically look at it this way, if our printing presses are printing money out at 100 mpm and the dollar is strengthening; how fast do you think other central banks are printing money from there printing presses? 150 mpm? 200mpm? Zimbabwae is at 1000 mpm. The numbers are getting so high it become hard to quantify. Second, credit and cash (debit) spend the same (this can be disputed but for sake of argument lets say they do). While people are looking for hyperinflation from the printing presses (the fed), they are not looking the huge credit contraction from banks. With banks contracting credit faster then the printing presses are printing money, I don’t see inflation anytime soon. Third, America money is the reserve currency of the world (reserve currency means all these things are sold in dollars; oil, crops, metals, etc. Foreigners must exchange or trade there currency for dollars); until that changes…. Well…. enough said. Forth, many foreigners in countries with an unstable currency borrowed money in terms of dollars; with there currencies falling in value, there debts are rising (good for the U.S., bad for them). This might not seem important, it is. In order to have a collapse of the dollar, you would need a collapse in demand. Even if confidence falls, as long as there is demand, money will still be needed/wanted. As pointed out above, their is still a high demand for dollars. The dollar cannot possibly become hyperinflationary with such high demand. However confidence is low, but it is not just low here, it is low everywhere. And when things look bad everywhere where do people turn, to things that have been safe the longest; gold and American cash.

Must watch.

CNN will be broadcasting a documentary called I.O.U.S.A. about the U.S. debt. As we all here already know is out of control.

This program is showing right now n CNN (2:00 p.m. EST) and tomorrow, January 11 at 3:00 p.m. EST. Please watch.


But the real problem is that the first baby-boomers retired last year.

This, to me, is one of the single most under-reported stories of 2008.

Think about it. This is like the tide turning at the Bay of Fundy. Once it turns, it picks up steam and you do not want to be standing in the shallows. The reality is that the baby boomers represent, demographically speaking, the collapse of the system as we know it. None of the entitlements, the tax system, or virtually any other socio-political-economic system is structured to actually survive the retirement of the baby boomers. Yet, virtually nobody in the MSM bothered to mention that, "Oh, by the way, the baby boom is retiring … HERE… NOW!"

And we wonder why it is so hard to get useful information into the hands and minds of the masses…

That sound you hear is the gentle lapping of the water at your ankles. The tide is coming in. But, shhhh, don’t tell anybody.




I get the same feeling, Greg. The political class has no objections to killing people in war. So I see no reason why destroying the economy in the name of power is any less difficult for them. I can foresee the day when the equity markets shut down for an indefinite time. I stick to physical possession of gold and silver, but I wouldn’t rule out the chance that I might have to hide it from the police.

Hi Skylight,

I noticed your questions and figured the best way to discribe the answer is to go back to the very begining of the ‘Crash Course’ where I found the first ‘Martenson Report’, covering the issue in greater detail. I’m still finding my way around here so I’ve simply cut and pasted the http link below. Hope this is a help!!

Kind Regards,





Question: Who is / would be buying U.S. treasuries if China or other such countries weren’t?

Question: Will the printing press (the fed) create a hyperinflationary state? <!--[if !supportLineBreakNewLine]--> <!--[endif]-->

Answer: The powers that be are far more intelligent and have more knowledge at there disposal then any of us could possible. Hell, most information (government data in particular) is so damn manipulated, as pointed out above, or opinionated that one couldn’t possible have any solid answers. <!–[if !supportLineBreakNewLine]–>

Jimbo - Just my $.02. The "powers that be" are in no way more intelligent than any of us. Do you write checks knowing that you don’t have sufficient funds? When you go buy groceries do you allow someone from Home Depot to force you to buy a wheelbarrow?

The powers that be are intelligent enough to tell enough stupid people what they want to hear - which gets them into office. The sheep that put them there are too ignorant and detached to hold them accountable for what they said they would do, so they continue to go to DC and do nothing. Except continue to grow and fester like a suppurating chest abscess.

Look at all the collection of Harvard and Yale and Columbia (insert whatever institution of ‘higher’ learning you want) degrees amassed by the amalgam of idiots in banking, industry and on Capitol Hill?!?!? The people who are responsible for the mess we are in now. Those degrees aren’t worth the paper they are printed on unless you roll them up and hang them on the wall in your bathroom.

(Apologies to degree holders from those institutions who are members of this site)

We put them there, now it is up to an informed populace to get people in there who know what is going on. We can’t count on the status quo - it will steamroll us.

As H L Mencken so eloquently stated: "Democracy is the theory that the common people know what they want and deserve to get it good and hard."