U.S. Debt Autopsy

Coming back from vacation, the world seems lost. You don't need to be an actuary to grasp that the recent decision to lift the U.S. debt ceiling is first class trickery and completely inadequate.

What the Chinese rating agency Dagong already concluded back  in November 2010, is only now (August 5, 2011) reluctantly and partly followed by S&P:

U.S. AAA status = Dead.

It's interesting to see which countries Dagong rates lower than  the three famous rating Agencies in the U.S.  (download complete Dragon report).

Meanwhile Dagong downgraded the U.S. again to an ordinary A-status on august 2, 2011.

The arguments for country degrades (as the U.S.) are as much clear as simple: if lifting debt ceilings is not at the same time combined with serious debt reduction measures (spending cuts), you go DOWN!

The outlook on the U.S. is still negative.

Outlook
Let's take look at what happened during 2011 and what 2012 will bring..

This chart instantaneously makes clear what's happening:

• Jan 2011 -  half May 2011
  Although  the whole world can figure out that the original debt ceiling of  $14.294 trillion will be reached within a few months, no measures or actions are taken by the U.S. Treasury to prevent a debt default,.
  
  
• May 16, 2011 - August 1,  2011
  Treasury Secretary Timothy Geithner informs Congress he will start tapping into federal pension funds on Monday to free up borrowing capacity as the nation hits the $14.294 trillion legal limit on its debt.
  
  By these and (possible) other optical actions the actual debt is kept artificially stable, slightly above the first ceiling. Of course the factual debt will (non reporting or visible) continue to keep growing.
  
  
• August 1&2, 2011
  The U.S. House of Representatives and the U.S. Senate pass the Budget Control Act on Aug 2, 2011.The debt ceiling is immediately raised by $400 billion, to $14.694 trillion.
  
  A second debt ceiling increase allows the current new ceiling to grow by an additional $500 billion, to $15.194 trillion, so that government can pay its bills until the end of February 2012.  However, Congress has the authority to reject this second increase.
  
  
• August 5, 2011 - March 2012
  
  TresuryDirect reports show the debt catch-up effects on August 5, 2011.
  
  Already $271 billion of the $400 billion debt ceiling lift turns out to be 'consumed'. Another $129 billion is left.
  
  As my two year old son can calculate: If no measures will be effective, around mid September 2011 a new ceiling crisis and media lift-show shall start.
  
  After agreeing in  September to the second ceiling of  $15.194 trillion the muppet debt show will start again in March 2012, when the second ceiling will break.

The party is over
I'm not a pessimistic person by nature, but the U.S. is running out of possible solutions. 

It looks like the financial space flight program is over. 

We'll have to build a society on new ethical financial principles.

If real measures stay out and claims on other countries or banks (as was the case with the sub prime debacle) are limited, the U.S. will unfortunately default in the end.

This U.S. default will take along most western countries.

It will result in a worldwide financial meltdown.

They only way out that seems left is:

Inflation

Let's hope for the best or a miracle. God bless America!



Related Links and Resources:
- Spreadsheet (Excel) with 2011 Debt Data
- S&P Report, August 5, 2011
- TreasuryDirect (U.S. Debt development)
- Debt Ceiling Increase of 2011
- Alert - Just So We Don't Get Confused As To The Source Of Our Little Problem