Chart of National Debt History – Future Implications with China

“If you owe the bank thousands, then you have a problem. If you owe the bank millions, then the bank has a problem.”

This picture is a to scale diagram of what the debt would look like in 100$ bills loaded on pallets. It is sourced here. Yes, that's a person in the lower right.

The US has over 13 trillion dollars in national debt.

Stop for just one moment and think about that number. It is such a large number it is almost impossible to fathom. 13x 1,000,000 x 1,000,000

Just one trillion dollar bills laid end-to-end would stretch all the way from the earth to the sun … and then back again.

The National government deficit (the difference between the amount the government spends and the amount it takes in, per year) for 2009 was a record-breaking $1.4 trillion and estimates suggest that 2010’s budget deficit will be $1.5 trillion.

Many countries around the world have a problem with spending, but the sub-prime mortage crisis and subsequent measures taken by the US government should demonstrate that there is a deep seeded problem with debt in the United States.

Almost every level of the United States has a problem with spending money it doesn’t have, which has fostered a mentality of buy now and pay later. This article is meant to show a very brief overview of the US national debt, and examine future implications involving its largest creditor, China, of which the US owes more than 800 billion USD.

As of June 1, 2010, the debt was valued at approximately 89% of the US gross domestic product, and for the first time exceeded $13 trillion. The annual government deficit or surplus is calculated by subtracting the difference between the money the government takes in, and the amont that the government spends or gives away.

The gross debt increases or decreases as a result of this unified budget deficit or surplus. However, there is certain spending (supplemental appropriations) that add to the gross debt but are excluded from the deficit. The total debt has increased over $500 billion every single year since 2003, with increases of $1 trillion in 2008 and $1.9 trillion in 2009. As the US gets into deeper amounts of debt, they increase spending, take more loans, and raise taxes. This is not the right way to get out of a recession.

Source

Check out this chart sourced from Wikipedia. As you can clearly see, the debt crisis is not a new phenomenon.

However, events such as the Iraq and Afghanistan Wars have pushed the debt to unprecedented levels.

U.S. policy-makers should consider the geopolitical and national security implications of operating a fiscal policy that depends on China and other foreign creditors, who collectively hold 50 percent of U.S. publicly held debt. If they decide to stop buying bonds, the US dollar could collapse. Although this is not likely, and it could cause a systemic economic collapse, there is a chance that faith in the almighty dollar is, or could someday be, significantly deteriorated.

See what some other sources have to say about the issue:

Maj. Gen. Luo Yuan told China’s state-run Outlook Weekly magazine last month, shortly after the U.S. detailed new arms sales to Taiwan,  that China’s “retaliation should not be restricted to merely military matters” but also should be “covering politics, military affairs, diplomacy and economics.”

“We could sanction them using economic means, such as dumping some U.S. government bonds,” Gen. Luo said.

Michael Wessel, a member of the U.S.-China commission, began the hearing by noting that China, whose economy expanded by 10.7 percent during 2009, “emerged from the global recession stronger than ever, expecting its status as America’s banker to convey new political power.”

“The United States government, with its fiscal and monetary tools constrained by the recession, cannot easily extricate itself from its growing financial dependence on China,” he said.

China and the US are inextricably tied financially through debt. It is in China’s best interest that the US dollar remains strong, and the Yaun stays devalued. Its pretty much accepted at this point by most economists that Chians Yuan is 30-40 percent undervalued. This is partially because the Chinese central bank purchases massive amounts of USD in order to peg the yuans value to the dollar at a much lower level, thus allowing for the debt owed to be larger than it would be if the dollar became devalued in respect to the yuan.

Its easier to think of in this way:

The debt is at a fixed amount of dollars, to be paid at a later date. So if the US dollar is worth more, China (or other debt holder) gets paid more. If the dollar is worth less, China gets paid less.

Any way you cut it, the United States owes a tremendous amount of money. This will carry large implications into the future of economic stability not just for the US, but for the entire world. It is unclear at this point what those implications might be, but if you are able to predict correctly and invest strategically, there certainly will be money to be made.