09/22/2010 08:55 am ET Updated May 25, 2011

America Digs Faster Into Debt Hole

The deleveraging message that is being preached by the main stream media is just blatantly false. The MSM likes to claim that Americans are paying down debt because it gives the appearance that the country is on the mend, which is something we all genuinely desire would occur. But facts are stubborn things and they must be dealt with and the facts clearly show we are digging faster into the debt hole. The Federal Reserve's Flow of Funds report for the second quarter of 2010 was released last week. In it we find the real figures that show America would most likely be on a path to true recovery if not for the intervention of the federal government.

There is some good news on the consumer front in that Households paid down debt for the 9th quarter in a row. In Q2 they deleveraged at a 2.3% annual rate, as their total debt outstanding dropped from $13.52 trillion to $13.45 trillion from Q1 to Q2. That's still about 92% of GDP, which is way up from the 48% level in 1980, but the direction is good. However, the message here could not be clearer. American households have decided -- either voluntarily or involuntarily -- that it is in their best interest to stop borrowing money and reduce debt levels in order to reconcile their balance sheets.

But the U.S. government -- with their typical display of hubris -- continues to believe that they should usurp markets and is preventing true deleveraging from taking place. While the consumer was busy saving, the Federal government was piling on debt at a much greater pace. In fact, during Q2 Washington accumulated debt at a 24.4% annual rate! Therefore, even though households and state and local governments have hopefully begun to learn their lessons; D.C. still managed to increase the overall level of non-financial debt in the U.S. to a record $35.45 trillion. And thanks to government's desire to supplant private sector borrowing, they have caused the rate of debt accumulation to increase from a 4.5% annual rate to a 4.8% annual rate quarter over quarter.

But the financial media and main stream economists only focus on consumers. For some reason they fail to understand or acknowledge that borrowing done by either households or government is virtually the same thing. The government does not own a factory or mine on another planet and they also do not have a store of capital goods in another dimension, which they can manifest into the real economy. Therefore, all government "stimulus"; either from borrowing, spending or printing is really just a form of deferred taxation, capital redistribution or inflation. That means all U.S. debt is ultimately backed by the tax base of the country. So whether it is the consumer or the government that does the borrowing is really unimportant because in the end it is the consumer that will receive the bill.

As of Q2 2010, total non-financial debt was rising at a 4.8% annual rate but GDP registered growth at a 1.6% annual rate. Therefore, U.S. debt as a percentage of GDP continues to climb and talk about a recovery or healing is not only premature but completely incorrect. The real question is how much more debt the U.S. can accumulate before the debt and dollar crisis begins?

Michael Pento is the Senior Economist for Euro Pacific Capital