America's Total Debt: $282 Trillion Dollars

“If you're still skeptical that we're sinking into America's Second Great Depression, you don't have to believe Alan Greenspan, who says we're already experiencing the worst financial crisis in a hundred years. Nor need you heed the news that the economy just lost a half-million more jobs or that retail sales have just suffered their worst plunge in 35 years. All you have to do is get up from your chair, open the door and take a walk outside. Nearly everything you see and hear will clue you in to the true plight of our time — one out of 10 households delinquent or foreclosed on their mortgage, one out of 10 using food stamps, four out of 10 upside down on their home equity, eight out of 10 fearful of the future, and rightfully so.

Our leaders themselves are sounding the alarm. Unless they act swiftly, they say, the world as we know it today will fall apart. Thus, to avert what they fear could be the ultimate disaster, the governments of the richest countries have embarked on the most expensive financial rescue operations of all time. The U.S. government alone has spent, lent, committed or guaranteed $7.8 trillion, fourteen times its biggest-ever federal deficit. European governments have jumped in with another $2 trillion; China, $586 billion. They're bailing out bankrupt banks, broken brokerage firms, insolvent insurers and any company they deem essential to the economy. They're pumping resources into mortgage markets, consumer credit markets and stock markets. They're prodding lenders to lend, consumers to consume and investors to invest. They're doing everything in their power to prevent a Second Great Depression.

Even as the government sweeps piles of bad debts under the carpet, mountains of new debts go bad — another flood of mortgages that can't be paid, a new raft of credit cards falling behind, a new line-up of big companies on the verge of bankruptcy. Even as the government commits new billions to be spent on financial rescues, trillions in wealth are wiped out in sinking real estate, stocks, bonds and commodities. Even as the government promises prosperity around the corner, we see more factories closing, more jobs lost. The primary reason is simple and quite obvious: Our society is addicted to debt.

As long as government could keep the credit flowing — and as long as borrowers could get their regular debt fix — everyone continued to spend to their heart's content. But now that credit has stopped flowing, the American economy is sinking rapidly into depression.

By mid-year 2008, there were $52 trillion in interest-bearing debts in the United States, including mortgage loans, credit cards, corporate debt, municipal debt and federal debt; the federal government needed about $50 trillion for Social Security, Medicare and other commitments kicking in at a quickening pace; and U.S. commercial banks held another $182.1 trillion in side bets called "derivatives." Grand total in the U.S. alone: $282 trillion.

The numbers are not directly comparable, but just to give you a sense of the magnitude of the problem, that's 402 times more than the $700 billion bailout package. If, along with their big debts, Americans at least had plenty of cash, it would not be such a problem. But, alas, nothing could be further from the truth. Americans have saved less than ever before in history and less than their counterparts in almost every other industrial country on Earth.

In the rush to spend the trillions of dollars, no one has bothered to seriously consider this simple question: "Who's going to pay for it all? Where are we going to get all that money?" With the economy already weak, it certainly isn't going to come through higher taxes. And with unemployment and welfare expenses surging, cutting the budget wasn't going to yield very much either. The government had only one choice: To borrow the money. More big debts!

Sure enough, last month, the U.S. Treasury Department announced that it would have to borrow $550 billion in the fourth quarter, more than the total budget deficit for the entire year. At the same time, Goldman Sachs estimated that the upcoming borrowing needs of the U.S. Treasury would be a shocking $2 trillion — to pay for the bailouts, to finance the existing deficit and to refund debts coming due. That was about four times the size of the entire yearly deficit. This meant that, to raise the money, the government will have shove aside consumers, businesses and other borrowers; hog most of the available credit for itself; and then, to add insult injury, bid up interest rates for everyone. As Mike Larson explained Friday, it's the biggest bubble of all.

Some people hoped the government's resources, by some feat of magic, might be unlimited. But the reality is that there is no free lunch, someone has to raise the money and pick up the tab. And as soon as they try to do that, the pain will strike swiftly — in the form of steeper mortgage rates, higher credit card rates or, worse, virtually no credit at all.

Debt alone is usually tolerable. People can pile up debts year after year, and as long as borrowers have the income — or as long as they can borrow from Peter to pay Paul — they continue making their payments. Life goes on. Deflation — falling prices and income — is also not all bad. It makes homes more affordable, college education more achievable, a tank of gas easier to fill. It's when the debts and deflation come together that the wheels are set into motion down the path to depression. That's what happened in the 1930s; and that's what began to happen this time as well.

In the housing market, Americans abandon their homes or are forced into foreclosure. The foreclosures precipitate distress selling. The distress selling causes price declines. And the price declines, in turn, prompt more people to abandon their homes or let them slide into foreclosure.

On Wall Street, we have a similar cycle: Big companies and banks run out of capital, cannot pay their debts and go bankrupt. The bankruptcies — and the fear of more to come — drive investors to sell their shares, forcing stock prices lower. With lower stock prices, corporations and banks cannot raise capital, and more go bankrupt.

Consumers, small and medium-sized businesses, city and state governments, hospitals and schools, even entire countries are caught up in a similar downward spiral — slashing their spending, laying off workers, dumping assets, losing revenues, and slashing their spending still more.

These vicious cycles are in full motion and gaining momentum. It's too late for any government to stop them. Now that the speculative bubbles have burst, all the king's men cannot put them back together again.”

- Martin Weiss, http://2cents.dailyreckoning.com/viewtopic.php?t=40116&highlight=