Bob Chapman: Mounting Public Debt, and the L ooting of Federal Pensions, Social Security and Medicare

Our US government debt will be in the vicinity of $1.5 trillion this year. Ever since May 16th, short term debt has been frozen at about $14.3 trillion! As one humorist appropriately said: A Trillion here, and a Trillion there, and pretty soon we're talking about big money. Up until May 16 this year, our fiscal debt was was $783.135 billion. That means if no August 2nd agreement is reached, $275 billion will be needed up to August 2nd, a total of about $700 billion will be needed by 9/30/11, at the end of the fiscal year. Those funds are to come from federal pensions, Social Security and Medicare. How will those funds be paid back? We do not know, but we would guess there could be legislation to commandeer private pensions, 401Ks and IRAs. On the other hand, an alternative is for the Fed to create $700 billion and buy the Treasury debt. That means they would have to create another additional $850 billion to keep the economy from slipping into a great dark pit. That means additional net funds that would have to be created out of thin air of close to $3 trillion. That means mega inflation 2 to 3 years down the line. In addition the US debt to GDP should be more than 100% by the end of the fiscal year 9/30/11. We guess the Fed can keep interest rates at near zero until borrowers finally get fed up with low returns and a loss in principal, as the dollar deteriorates. It was four years ago when rates were 5-1/4%. Rates in time will return to that level and cause economic and financial devastation. We can also assure you Treasury buyers are not driving rates down and bond prices up, the Fed can take full credit for that. Those who seek safety in low interest Treasuries are giving up purchasing power. In today's markets there is no such thing as safety!