…And How Living in a Flat-Broke America Affects You

Also In Today’s Letter…

• Do You Have $344,000 to Pay Uncle Sam? You Should.
• Six Critical Deficit Problems Facing the U.S.
• Why the Dirt-Cheap Buck Helps the U.S. and Hurts You

As often as I write about the miserable U.S. economy, you would think I could spin off a note to you quickly about how this all affects the U.S. dollar.

Or at least, that’s what my editor thought when she asked for my latest thoughts on the U.S. debt situation. She thought that I could write this in my sleep, but not so… there’s too much to cover!

But of course, I’ll do my best. First, let’s start with some facts.

As of today, the U.S. National Debt is nearly $12 Trillion dollars. That’s a monster in itself, but it’s nothing compared to what the U.S. really owes…

Do You Have $344,000 to Pay Uncle Sam? Well You Should.

You see most people have no idea what the U.S. government owes on “unfunded obligations”. That’s government-ese for entitlement programs like Medicare, Social Security, etc.

Right now, the total unfunded obligations sits at $106 Trillion dollars! That’s 780% MORE than the “national debt.”

Now, let’s do a little math…

If you charged Americans for the national debt, each citizen would have to shell out $38,940. If you just charged taxpayers, that tab would climb to $104,000 per person.

Our nation’s Total Assets now stand at $74 Trillion dollars, or $240,000 per citizen.

Now add in the “unfunded obligations” at $106 Trillion, and every citizen would have to shell out $344,000 to keep us afloat.

In other words…as a country, we are flat-broke!

By the way, if you don’t believe me, you can go to the National Debt Clock website and see for yourself. But I warn you don’t go there if you have a weak stomach.

How in the World Did Our Debts Reach This High?

This deficit spending all began in the ’80s. However, at that time, the government was much smaller than it is today.

Let’s talk about some fallacies that exist when people talk about deficit spending that began in the ‘80’s in the Reagan administration…

Ronald Reagan increased the deficit by 35% in eight years, or $37 Billion per year. At the time it seemed like a lot. After all, the U.S. was a surplus nation at the time. In fact, economists viewed this 35% increase in eight years as “excessive.”.

But when you compare it to the first eight weeks of the current administration, when Obama and his team increased our deficit by 435%, the Reagan years don’t look so “excessive” any longer!

Now I’m not comparing parties here. I’m just making the point that deficit spending started more than 25 years ago, and continues today only at a much faster pace.

Six Major Deficit Issues…the Reason We Have a “Leadership Deficit”

In my opinion, the biggest deficit in this country is a leadership deficit. We have people in Washington D.C. that continue to make bad choices and spend, instead of dealing with a solution to reduce the government and the deficit.

Dollar Index Has Fallen More than 37% Since Its High in 2001

Unfortunately all Americans on the street are paying for this leadership deficit where it really hurts…in our currency. The U.S. dollar has dropped 37% in value since it peaked in 2001. And the situation does not look to improve anytime soon.

Just take a look at all the deficit issues facing the U.S., and anyone who pays their dollars…

1. Foreigners are scaling back their bond purchases. You need people to pay your debts. The only way to do that is to issue Treasury bonds and auction them off to foreigners. But you can’t auction off too many or it dilutes the value of the Treasury bonds you already issued. Right now, the Treasury is frantically issuing record amounts. The big question is when do the foreigners say “no mas” and refuse to buy?
2. Uncle Sam doesn’t have the future earnings to pay for all these bonds. In other words, you have to repay your deficits. Right now, the Treasury is issuing a record amount of debt in the form of bonds. The Treasury is on the hook to pay a staggering $11.9 Trillion in outstanding Treasury securities. Now in future years, they’ll have to pay the interest when those bonds mature. They have issued so many Treasuries lately that the government won’t be able to rely on just tax receipts to match the interest. That could lead to a sovereign bond default (economic suicide for a country). Or more likely, the U.S. will just issue more bonds to cover that interest…issue more debt to pay for debt.
3. With every new auction, the buyers thin out. That’s why the Federal Reserve has stepped in to buy whatever bonds are not purchased in the auction. How does the Fed get the money to purchase these bonds? They print it out of thin air! The Fed prints new dollars, thus diluting the value of all the dollars that are in the system.
4. Investors are dumping dollars. When the dollar’s value has been diluted, forex traders become very concerned and the “selling of the dollar” begins.
5. Every dollar you hold is worth less. When the “selling of the dollar” begins, all of us who pay our bills with dollars lose purchasing power! Things begin to cost more, and your dollar buys less. It’s that simple.
6. In depending on the “kindness of strangers” the U.S. loses control of its own destiny. Countries like China and Japan hold HUGE amounts of dollars and Treasuries (40% of our Treasuries), so they have more bargaining chips. They could begin to make demands on the U.S. and we will have to listen to them otherwise deal with the fact that these key nations won’t buy at the next Treasury auction!

Why the Dirt-Cheap Buck Helps the U.S. and Hurts You

Here’s the real rub folks…

No matter how Treasury Secretary Geithner might preach about “maintaining a strong dollar,” as he said again at the U.S. embassy yesterday…the truth is a weaker dollar benefits the U.S. government.

Of course, the weak dollar also hangs Americans out to dry. We get stuck with the bill as every dollar we have buys us less.

But the weaker dollar allows U.S. exports to be more competitive in the world. The weaker dollar also allows multi-national business to enjoy huge profits overseas.

Oh! And here’s the 800-lb Gorilla in the room that I almost forgot about… The weak dollar gives the U.S. government the ability to pay back our deficits with “cheaper dollars.” It means that Uncle Sam doesn’t have an incentive to pay off our debts. That’s the cheese that binds for the dollar folks!

To recap quickly, the deficit spending in the U.S. has reached a dangerous level. The U.S. is broke. We have a leadership problem, we continue to deficit spend day after day and even worse the weaker dollar is actually benefiting Uncle Sam (while it hangs Americans out to dry).

One day this will all come crashing down like a house of cards, folks… and when that happens, you’ll want to have some cash outside the dollar. Trust me.

That’s it for today…Have a good day and Thundering Thursday!
Chuck Butler

EDITOR’S NOTE: This is truly just the beginning. To learn more about how the U.S. debts are affecting your long-term savings, read Chuck’s latest special report.