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The Fallacy of Intragovernmental Debt

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Some believe intragovernmental debt doesn't count toward total US debt -- but it does.

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A growing problem: Baby boomers are beginning to retire. Add in early retirements due to the weak economy and S.S. beneficiaries climbed by nearly 20% from 2008 to 2009. Revenues (taxes in) have steadily dropped. The CBO is now forecasting a small annual Social Security deficit through 2012. With no surprises, 2017 is the year where benefits and revenues begin to "structurally" separate for the worse. This is a real problem, but there's still time before any crisis in this regard.

Remember, Social Security is just one form of GAS. Veterans, the disabled, military and civilian pensions, and retiree health benefits, etc. are all covered by various government agencies that hold GAS securities. Unmistakably, this is part of the public debt; the debt that the federal government is responsible for paying with tax dollars. The Treasury itself says on its website, "The Treasury securities issued to the public and to the Government Trust Funds (Intragovernmental Holdings) then become part of the total debt." Monies due, very simple.

For those that attempt to understate the debt problem in the United States, one must embrace the notion that it's easier to break a benefit due than monies due on a bond. And there's a degree of truth in this. For instance, as citizens, ultimately we're subject to the rules the government makes. Foreign creditors, however, may not be so accommodating. Perhaps it will be easier to break a promise over a bond. But still, the intragovernmental debt is held in GAS securities, so this is more untouchable than a benefit.

The Wildcards

I believe there's time before the United States would potentially face a showdown with credit. Many countries and continents would probably struggle first. We're seeing this now in Greece and Portugal, and with the European Union in dealing with these issues. With all the talk about liabilities, I never hear people talk about US assets. Remember, in a crisis, everything is on the table. There are Federal Lands and advanced weaponry that could all be used as collateral to mollify a crisis, and this is important to consider. It should be clear I'm not sounding the final bell on debt here. But there are disturbing developments as well. According to the Treasury Dept, the average maturity of US debt has fallen from between 60 and 70 months (from the mid-80s to 2002) to approximately 48 months currently. This data suggests that new debt auctions are a fixture of the future. More than anything for small businesses, it was an inability to find new buyers of expiring debt that forced upwards of 50% of small businesses to file bankruptcy in 2009. It's happening to Dubai and Greece.

This is a long road, this debt worry. The dollar's emergence as a flight-to-safety trade suggests the piper isn't yet around the corner. True as this may be, any claim that America's debt is not a "structural" problem facing our country today is highly questionable. To suggest that those that believe the US debt is around 80-95% of GDP are fear mongers is simply inaccurate. Ultimately, a government and generation that have claimed an inalienable right to living by a standard beyond one's means for decades is truly immoral. One could argue that it's tantamount to stealing. Make no mistake: Taxes are going up, and promised benefits are going down. Many people don't seem to fully grasp who pays for the largess -- we do. Yes, in the end, we do, that's who.
No positions in stocks mentioned.
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