Where is the Money Coming From?

As the US sends even more troops to Iraq, as a pf blogger I would be shirking my fiscal responsibility if I didn’t at least ask the question: “where is all this money coming from?”

The answer, is fairly simple: debt. A little bit of digging on one of our government websites offers some staggering statistics. In just one year, our national debt, largely inflated by continued expenses from the war on terror, being waged largely in Iraq, contributed to an increase. And no small amount at that. Rather, the total debt went up by just over 550 billion dollars from 2004 to 2005 for a total of 7.9 trillion dollars. This marks an increase of approximately 7.45 percent in compounding interest.

Interest is racking up. Normally, you wouldn’t worry about that if it was a smaller amount of money like a few thousand dollars in our coffers. However, the fact of the matter is, we are not generating enough products - gdp in order to keep up with the increase. So the natural question, for someone investing in the united states debt (treasurydirect.gov is a great place to do that in the form of ibonds, tbills, or savings bonds), is United States debt a good investment?

Not long ago, I brought this question up to an investor who manages accounts for large accounts, high net worth clients. And I brought up the concerns about inflation. My concern being that we will have to print more money in order to keep up with this debt and that our inflated currency will become worth less and the chinese and other economies will surpass us.

The response I got was not what I expected. And so, despite hearing ideas from Rich Dad author Robert Kiyosaki dictating the opposite idea, I was interested in this opposing viewpoint which I share with you here: if the United States economy gets a cold, the Asian economy gets pneumonia. The idea here being that the chinese and other economies are at a first tier level. That is, they have an abundance of raw materials and cheap labor for manufacturing. The united states on the other hand, has a smaller, but overall, more highly educated population. The net result is that we can do lots of shopping at wal-mart for chinese goods at cheap prices.

The question was then simple: what if china decides to double its prices? The answer: it will have a very hard time doing it. In an open market, companies like wal-mart and others are competing. And if they have a hard time getting good prices from their suppliers, they punish them and have no mercy. The end result is excellent prices for goods when you go shopping at wal-mart or a competitor.

All of this begs the question though — does this high amount of debt really make sense? Ignoring the cost in human life, you might ask yourself if the war and its continued efforts make sense financially? Will the united states ever be able to pay back this money? And I think that the answer is that we will, but it will have to be through a combination of fiscal responsibility, cutting programs, and raising taxes. There is no other way out of this hole. Just the interest on the national debt is approaching an unreasonable level and soon, when government program benefit payouts hit their peak, we will be in real trouble. There will no longer be a social security surplus to hide behind.

Source Data:

http://www.publicdebt.treas.gov/opd/opdhisto4.htm

Historical Debt Outstanding - Annual
1950 - 2005

* Rounded to Millions
Includes legal tender notes, gold and silver certificates, etc.

Looking for more historical information?
Visit The Public Debt Historical Information archives.

Date, Amount:

09/30/2005 $7,932,709,661,723.50
09/30/2004 $7,379,052,696,330.32
09/30/2003 $6,783,231,062,743.62
09/30/2002 $6,228,235,965,597.16
09/30/2001 $5,807,463,412,200.06
09/30/2000 $5,674,178,209,886.86
09/30/1999 5,656,270,901,615.43
09/30/1998 5,526,193,008,897.62
09/30/1997 5,413,146,011,397.34
09/30/1996 5,224,810,939,135.73
09/29/1995 4,973,982,900,709.39
09/30/1994 4,692,749,910,013.32
09/30/1993 4,411,488,883,139.38
09/30/1992 4,064,620,655,521.66
09/30/1991 3,665,303,351,697.03
09/28/1990 3,233,313,451,777.25
09/29/1989 2,857,430,960,187.32
09/30/1988 2,602,337,712,041.16
09/30/1987 2,350,276,890,953.00
09/30/1986 2,125,302,616,658.42
12/31/1985 1,945,941,616,459.88
12/31/1984 1,662,966,000,000.00 *
12/31/1983 1,410,702,000,000.00 *
12/31/1982 1,197,073,000,000.00 *
12/31/1981 1,028,729,000,000.00 *
12/31/1980 930,210,000,000.00 *
12/31/1979 845,116,000,000.00 *
12/29/1978 789,207,000,000.00 *
12/30/1977 718,943,000,000.00 *
12/31/1976 653,544,000,000.00 *
12/31/1975 576,649,000,000.00 *
12/31/1974 492,665,000,000.00 *
12/31/1973 469,898,039,554.70
12/29/1972 449,298,066,119.00
12/31/1971 424,130,961,959.95
12/31/1970 389,158,403,690.26
12/31/1969 368,225,581,254.41
12/31/1968 358,028,625,002.91
12/29/1967 344,663,009,745.18
12/30/1966 329,319,249,366.68
12/31/1965 320,904,110,042.04
12/31/1964 317,940,472,718.38
12/31/1963 309,346,845,059.17
12/31/1962 303,470,080,489.27
12/29/1961 296,168,761,214.92
12/30/1960 290,216,815,241.68
12/31/1959 290,797,771,717.63
12/31/1958 282,922,423,583.87
12/31/1957 274,897,784,290.72
12/31/1956 276,627,527,996.11
12/30/1955 280,768,553,188.96
12/31/1954 278,749,814,391.33
12/31/1953 275,168,120,129.39
06/30/1953 266,071,061,638.57
06/30/1952 259,105,178,785.43
06/29/1951 255,221,976,814.93
06/30/1950 257,357,352,351.04