The National Debt in Perspective

Whenever the National Debt is discussed in the mainstream media (MSM), it seems as though the focus is usually on the empirically measured size of the "official" debt, how it came into existence, how fast it's growing and the like. Unfortunately, there seems to be little conviction of or commitment to the need to tame this beast nor any serious efforts to try to put the problem in perspective.

In this article I will try to achieve several goals: 1) compile a more comprehensive tally of this country's obligations than that which the MSM usually presents, 2) discuss the often overlooked or ignored issue of derivatives 3) try to put this information in a perspective that will clarify for the reader the truly serious nature of this burden and 4) suggest a simple, logical and I believe effective way to protect oneself from the looming storm clouds on the horizon.

Ask the man on the street how large our current national debt is and, if they have been paying any attention at all, they will usually guess within a trillion or two dollars of the "official" figure. Pursue the matter a little further by asking about any other obligations that Uncle Sam might have contracted, and you may receive a blank stare in response.

Zeroing in on the matter, you may then ask "What about Freddie Mac's and Fanny Mae's obligations?" Perhaps a puzzled look will reward you for your efforts.

"How about all the unfunded liabilities to which this government has contractually obligated itself?" You may hear, "Oh, you mean like Social Security?" Given the MSM's myopic emphasis on the "official" figure, you probably would not be surprised with your survey's results.

With a little online research your interview subject would quickly and easily discover the following: 1) When the U.S. Government bailed out Freddie Mac and Fannie Mae in 2008, it assumed a substantial portion of its liabilities, today estimated to be approximately $6.3 trillion. 2) Unfunded liabilities to the Social Security, Medicare, Retirement, and Black Lung programs alone amount to at least $169 trillion. 3) The "official" National Debt figure (the one you see clicking away 24/7 on a debt clock in your vicinity) has now passed $15.3 trillion. Adding up all these liabilities, the total of approximately $190 trillion casts the problem in a stark new light.

Granted the unfunded liabilities are obligations that are not due today but they are nevertheless contractually binding on Uncle Sam in the future. That means my child and your kids must assume responsibility tomorrow for our irresponsible spending today. I've often wondered how we as a nation can mortgage our children's future in good conscience, and the only answer I can come up with is that it's all about outright denial. Our ability to tie this stinky little package up in a bow and tuck it away in that pigeonhole at the farthest recesses of our brains labeled "way future problems - no worries!" is appalling in my opinion. The government must pay the programs' recipients these promised amounts or face their wrath, and our kid must foot the bill. Of course, there is always the option of default but that would not be a pretty sight.

The simple fact that Uncle Sam already borrows more than $.40 out of every dollar it spends should alone be enough to wake us up, but apparently not. Imagine what your finances would look like if you tried to do the same.

To make matter worse, the interest rates on these debts is currently being held at incredibly low and artificial levels thanks to Fed Chairman Bernanke's policy. What will happen as the world continues to lose faith in the U.S. Government's ability to repay its debt because of its steady, deliberate debasement of its own currency? I believe at some point relatively soon, Uncle Sam will have to pony up for higher interest rate payments on any new debt issued to its creditors. Just as you and I would be required to pay higher interest rates on our credit cards if our creditworthiness were to drop, so too will Uncle Sam ultimately be taken to task by those whose loans are virtually keeping this country afloat.

This could be a huge problem. It has been estimated by some, that the approximate $230 billion in annual interest payments made today on government debt could easily mushroom into a trillion dollars per year by the end of this decade. Combining that estimate with the fact that the government currently brings in a total of approximately $2.6 trillion in annual revenues and that it borrows approximately $.42 for every dollar it spends, it doesn't take a math wizard to realize that there will be a day of reckoning in the not too distant future. Perhaps the most telling aspect of this whole situation is that this series of events is one of the primary reasons David Walker, who served as Comptroller General of the Government Accountability Office from 1998 to 2008 (under both political parties), left his job. He joined the Peter G. Peterson Foundation and subsequently founded the Comeback America Initiative in an effort to sound the alarm that we are headed for a fiscal train wreck unless the government changes course. Remember, this is coming from a man who, as the number one accountant, would know the financial condition of the Country better than any other person.

I would like to try to put the severity of this problem in an even more focused and hopefully meaningful light. With a total liability figure of $190 trillion and a total Gross Domestic Product (the market value of all production in the U.S. for a given year) of approximately $15.3 trillion, Uncle Sam's current liabilities are at least 12 times the amount of its total production. That would be similar to an individual earning $100,000 per year and having unsecured debts and future obligations of over $1.2 million. While government debt is considered to be secured by the "full faith and credit of the United States Treasury", I pose the question: "How secure is an obligation guaranteed by a fundamentally bankrupt country?"

All of this omits the fact that the financial system is awash with so-called derivatives which are often described as side bets or insurance policies on underlying assets. The following defines them well:

"A security whose price is dependent upon or derived from one or more underlying assets. The derivative itself is merely a contract between two or more parties. Its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes. Most derivatives are characterized by high leverage." (http://www.investopedia.com/terms/d/derivative.asp#axzz1mCDeDAZq)

Indeed, it is reported that the amount of derivatives worldwide exceeds the GDP of the entire world…by a factor of 10. In terms of the potential risks associated with derivatives' "leverage" mentioned above, look no further than credit default swaps (one such type of derivative) which were responsible in large measure for the collapse of Bear Stearns, AIG, and Washington Mutual during the last financial crisis. "Paper" contracts on the sale of gold are another example. It is well documented that for every ounce of physical gold sold today, there are over 100 "paper" ounces (derivatives) sold with virtually no physical backing. This means that there are many investors out there purchasing what they assume to be the "real thing" (i.e. physical metal) when in fact they are not. While at first blush that may cause some to be skeptical, it becomes a little easier to accept when one realizes that there are currently multiple lawsuits against a couple of the largest financial institutions responsible for this manipulation. Can you imagine what will happen if gold investors decide to take delivery on their physical metals all at once? The Commodities Futures Trading Commission, one of the regulatory agencies responsible for overseeing trading within the gold market is well aware of the problem having been petitioned multiple times to rectify it. Hopefully, it is finally taking steps to end it once and for all.

What would be a wise course of action to take given this information? While I can't and won't make investment recommendations to anyone as I am not a licensed financial advisor, I can tell you what I have done as a result of my own intense research over the last three years and that is protect myself by investing in vehicles which are inherent stores of value. Unlike the U.S. dollar and all fiat currencies for that matter, hard assets such as silver, gold, platinum, palladium etc have intrinsic worth by virtue of the fact that they are relatively scarce and require substantial effort and expense to explore and produce.

The increase of U.S. dollars within the economy is limited only by the speed with which Mr. Bernanke can operate his printing presses (or perhaps enter the keystrokes in this digital age). More importantly what is the intrinsic value of our Fed Chairman's dollars? Perhaps a little ink and paper…literally pennies. Oh, yes, they also are guaranteed by the "full faith and credit of the United States Treasury", but as we have seen… In times of great uncertainty, the precious metals sparkle particularly brightly in the eyes of the populace as it is considered a safe haven. For that reason their likely increasing market demand going forward greatly increases the odds that you will not only preserve your wealth but will also grow it.

I like to think of it this way. If the above claims about precious metals prove inaccurate, the worst case scenario is that you will be holding precious metals which may drop some in price but have never seen their market value go to 0. In fact, they have been shown unequivocally over thousands of years to effectively maintain one's purchasing power. On the other hand, if these claims are accurate as I believe, you could very well find yourself (during a currency collapse) bemoaning the greatly reduced purchasing power of your investments, even as you may be continuing to fund these vehicles. Such a collapse goes hand-in-hand with the occurrence of a hyper-inflationary depression which many financial experts are predicting today.

I ask that you not take my word regarding this information and instead do your own due diligence. The Internet, I believe, has become the great equalizer and is now allowing everyday people like you and I to gain access to first-rate financial information previously dispensed to only the more affluent amongst us. Because of the dire situation this country currently faces (and which is shamelessly glossed over by the mainstream media), I believe it is critical now more than ever, that your financial information come from advisors that are seasoned, informed and unbiased in their outlook. While blind adherence to "traditional" financial news sources are potentially a recipe for disaster going forward (and yield information deficits like those mentioned above), a proactive mission to inform yourself through your own research will likely pay handsome dividends in the future. Our debt has grown exponentially over the last decade thanks to the obtuse, negligent and, in some cases, self-serving and malevolent intentions of our elected officials and corporate executives. I suggest taking the matter into your own hands and leveling the playing field.

Disclaimer: While I am a staunch advocate of silver, gold and other precious metals, I am not involved in the business of selling them (other than indirectly through HubPages). Neither am I a professionally licensed investment advisor. It is recommended that all perform their own due diligence.