Debt: Part II.....is it meaningful?

Any number of pundits will tell you that debt does not matter. Tell that to the people in Greece. When a national economic system goes down the tubes, it is not a pretty sight.

Could that happen here?

Go back and look at the debt clock in the previous post: the national debt is listed as roughly $12 Trillion dollars.

But go to the bottom of the debt clock and look at something called US Unfunded Liabilities. That number is a whopping $107 Trillion dollars!

Now, we don't owe that $107 Trillion dollars today. But it represents the value of the promises we have made with our entitlement programs like Social Security, Medicare, Medicaed, Federal Pensions and other benefits.

Although we don't owe those unfunded liabilities today, people who purchase our debt can look at that and someday decide we can't pay that back. They will then demand a higher interest rate on the debt they buy from us and that will bite our budget.

Let's look at what it costs to service our debt: today with interest rates at around 1%, the interest on our debt is ~$120 Million dollars. Relative to Obama's $3.8 Trillion budget that does not seem so bad.

But what if creditors get nervous and all of sudden demand say 6% to buy our bonds?

Then our interest on the debt goes to $720 Million dollars. How do we pay that?

Either we refuse to make the interest payments, or we start cutting government spending to service the debt. If we cut spending that will likely lead to the types of riots we have seen in Greece.

How do we deal with the debt if no one will purchase it at reasonable rates? That will be in part III