American Debt: How Did It Come To This?

American Debt: How Did It Come To This?

The American debt, namely the total amount of money the federal government owes (including the deficit and the interest on borrowed money) is of circa $13 trillion this year, and is increasing at a fast rate. Out of this huge sum of money, some $8 trillion is owed to bond mutual funds and foreign governments, that is, to those that bought US governmental bonds, and the rest of $5 trillion to government trust funds such as Medicare and social security. But despite the fact the US owe a staggering half of trillion dollars to Japan and another half to the United Kingdom and China, most part of the national debt, namely 78%, is owed to domestic businesses and government entities. Has a whole nation deceived itself? Well, some lost big and some won big, but in the end everyone lost. Paradoxically, this is the truth.

Citizens have been encouraged to live on credit for decades, but that was fine as far as people could finally settle their debt; and they had to, if they wanted to borrow again as they were used to. But this habit became catastrophic with the real estate bubble. In less than a decade (1997-2006), the price of an average house had increased by 124%. Encouraged by these developments, a lot of owners refinanced their houses at lower interest rates, taking out a second mortgage based on the price increase. What they did with the money so easily earned? That’s simple: they spent it; only between 2001 and 2005 the refinancing money spent had doubled. But they have never thought that house prices could go down, credits could be impossible to obtain and mortgages to pay off and, therefore, that their properties would eventually be foreclosed by banks. But that’s exactly what happened.

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And this was still only the tip of the iceberg. These prime borrowers had at least something to lose in favor of the crediting banks. But with the sub-prime credits granted to people that presented high risk of default (2004-2006), the banks remained completely exposed. And, as expected, they lost, and lost big. Besides, the bubble was over and house prices went down. Few could afford to buy them even so. So, at best, banks remained with a lot of houses they couldn’t sell. The question is how was such substantial crediting without the right securities possible in the first place? If the borrowers, just normal citizens, without sophisticated financial knowledge were unconsciously getting more and more indebted, what happened with the lenders – major banks – expert in financial intricacies? Why should they doom themselves to bankruptcy, lending unconsciously, at random?

Well, believe or not, exactly the government and the banks encouraged, if not generated the indebtedness, by financial deregulation, changed laws, poor financial enforcement, off-balance financing and elaborate financial creations such as derivatives, CDOs, CDSs, MBSs and other such. When regulators themselves come with tricks for circumventing the laws, there is no surprise that not only the common citizen loses but also those that weakened the laws. In these conditions, the $700 billion amount used by the government to rescue the banks that caused this havoc in the first place does nothing but confirms the self-deception scenario. In this way, all have become deeply indebted: citizens, the banks and the federal government. The paradox has been unraveled.

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Possible solutions would be less government and consumer spending, more production and, of course, investment in reliable assets (definitely not houses), which warrant gains. So, if you still have money, buy gold!