The US Budget Dilemma

November 6th, 2012 at 11:00 am by David Farrar

Have a look of this five minute video which describes and shows clearly how bad the US Budget deficit is. Basically it is impossible to close, which means I’d say the US will have to print money in a big way to cover the debt, which will of course mean the NZ dollar will keep rising relative to the US. We can do nothing to stop this, unless we have hundreds of billions to waste on trying to stop it happening.

The presenter tells us how the spending is $3.8 trillion for 2013, the income $2.5 trillion and deficit $1.3 trillion.

Now expenditure is in three categories. Mandatory entitlements, interest on debt and US Federal Government discretionary spending. The mandatory entitlements are $2.2 trillion and interest is $0.2 trillion which is (rounded) $2.5 trillion. So the federal income is just enough to meet mandatory entitlements (Social Security, Medicare etc) and debt interest.

Now of the $1.3 trillion “discretionary”, $0.9 trillion is on security such as the military.

So to balance the Budget, there are three options:

  1. Increase taxes by 50%
  2. Abolish the Federal Government, including the military
  3. Massively cutback entitlements on social security and Medicare which would probably lead to Greece style riots

It would be nice to think if you get the economy growing, then that will increase tax revenues enough. But the spending has been increasing far faster than the economy.

The presenter concludes it is a matter of when, not if, the US gets downgraded again.

 

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49 Responses to “The US Budget Dilemma”

  1. aspbr049 (2 comments) says:

    He had me interested until he implied that raising the debt ceiling is a bad thing…

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  2. YesWeDid (1,042 comments) says:

    My understanding of the situation is they the size of the annual deficit is roughly equal to the amount of tax deductions claimed.

    In other words they don’t need to increase tax just shut down all the tax breaks and loopholes that allow people and business to pay less tax.

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  3. Alan Johnstone (1,082 comments) says:

    It’s not impossible to close; it’s in fact 100% certain to be closed.

    If something can’t go on for ever, then one day it will stop. Sounds a simple statement, but actually very profound.

    The US simply can’t go on printing money in meta terms; every dollar printed is worth less.

    Like you say, there are three options, just because they are unpalatable doesn’t magically create a fourth options of “fluffy bunnies and pony’s for all”.

    The actual answer of course is all of the above. 30% increase in taxes and massive spending cuts.

    People may not like it, but the maths are inexorable.

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  4. Fisiani (993 comments) says:

    We don’t know how lucky we are.

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  5. Alan Johnstone (1,082 comments) says:

    Just to add, all empires collapse under their own weight. History teaches us this, it’s just a matter of time. White mans burden etc etc

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  6. KiwiGreg (3,218 comments) says:

    “We don’t know how lucky we are.”

    Why? Our fiscal deficit is larger and we don’t have the luxury of seignorage.

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  7. Alan Johnstone (1,082 comments) says:

    @Fisiani, not really, they’ll drag the world down with them.

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  8. dime (9,664 comments) says:

    goddam entitlements.

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  9. anonymouse (708 comments) says:

    Well they have less than 60 days to push the boat out again, the 1st of January 2013 is approaching fast…..

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  10. hmmokrightitis (1,571 comments) says:

    Im sure toady will be along soon to remind us that we can QE our way to a lower exchange rate.

    toady?

    Hello?????

    Yeah, thought not.

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  11. fish_boy (152 comments) says:

    Over 70% of the Federal budget is spent on the military. The United States has a military-industrial complex that demands never-ending war, but the congress – controlled by a minority of paranoid aging whites (AKA the Tea party) refuse to adequately fund these wars. Either raise federal taxes or reduce defense spending. Simple as that.

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  12. s.russell (1,580 comments) says:

    Very good summary, though I suspect the problem is not quite as bad as painted: tax revenues should bounce up substantially with a growing economy.

    Nevertheless, some serious and painful action is needed, and it is disgraceful that US politicians will not confront the issue and do what is necessary: which is to cut entitlements AND increase tax revenue (getting rid of some or all of those deductions being an excellent place to start).

    For that failure both Democrats and Republicans can share the blame.

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  13. dime (9,664 comments) says:

    “Over 70% of the Federal budget is spent on the military.” – I call bullshit. Links please.

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  14. cha (3,856 comments) says:

    http://tomwfox.wordpress.com/2011/08/07/defense-spending-as-a-percent-of-personal-income-tax-1994-2010/

    The significant detail is that in 2009 and 2010, U. S. Defense spending was at a level that consumed more than 77 cents of every dollar received through personal income tax payments

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  15. KiwiGreg (3,218 comments) says:

    @dime there are no links because it’s not true

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  16. dime (9,664 comments) says:

    “received through personal income tax payments” – thats not the federal budget.

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  17. East Wellington Superhero (1,151 comments) says:

    If the US Navy doesn’t keep the sea-lanes free who will?
    The UK or the French? Bahahaha.
    The UN? Bahahahahahahahaha.
    Let’s face it. We love the security the USA gives us. And we’ll whinge/scream like bitches when that security disappears.

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  18. Hamnida (905 comments) says:

    A last gasp attempt to down Obama.

    What are the statistics for Kiwiblog readers in Ohio?

    [DPF: You realise you come over demented when you make comments like that]

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  19. Yvette (2,744 comments) says:

    In Greece, avoiding paying tax appeared to the a national pastime – somewhere in the region of US$200 billion
    Meanwhile Romney avoids questions on his income and tax, but the rate he paid last year is guesstimated at 15%, very much less than the average worker.
    Many large corporations are reputed to pay no, or minimal tax in the USA.
    Tax avoidance is another way the USA is going down the Greecey slope.

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  20. RightNow (6,841 comments) says:

    If only Obama read Kiwiblog, he could fix the US economy.

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  21. Bevan (3,965 comments) says:

    He’ll complain its wiki, but fuck him….

    http://en.wikipedia.org/wiki/File:U.S._Federal_Spending_-_FY_2011.png

    19% of the budget, mind you it is disingenuous to even talk about military spending as a percentage of the budget when every other countries military expenditure is typically talked about in comparison to GDP in which case the US is around the 5% mark.

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  22. dime (9,664 comments) says:

    “but the rate he paid last year is guesstimated at 15%, very much less than the average worker.”

    so basically that bastard romney earnt a shit load of money, paid a shit load in tax on it, saved it and then paid another 15% in tax on the interest? what a grade a asshole!

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  23. Bevan (3,965 comments) says:

    @ cha, please don’t tell me you are using that to support fish_boys argument….

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  24. cha (3,856 comments) says:

    Pointing out that fish-boy has confused the income tax spend with the total spend.

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  25. cha (3,856 comments) says:

    Some chart porn.

    http://www.cbpp.org/cms/index.cfm?fa=view&id=1258

    http://www.ritholtz.com/blog/2012/03/military-balance-2012/

    http://www.economist.com/blogs/dailychart/2011/06/military-spending

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  26. tom hunter (4,564 comments) says:

    The United States has a military-industrial complex that demands never-ending war, but the congress – controlled by a minority of paranoid aging whites (AKA the Tea party) refuse to adequately fund these wars. Either raise federal taxes or reduce defense spending.

    More left-wing cliches brought to you by fish_boy – fresh from the 1970′s.

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  27. Ed Snack (1,797 comments) says:

    Yvette, how to lie by omission lesson 101. Facts, in the USA Dividends are taxed at a lower rate than salaries and wages because corporations also pay tax and unlike NZ there is no imputation credits available for that tax. With the nominal corporate tax rate at (I think) 35%, any company that Romney gets dividends from pays 35% (less of course any legally mandated allowances and those are legion, but also legal), and Romney pays a further 15% on what he receives, so that income is taxed at close to 50% already.

    Capital gains are also taxed at a lower rate than salaries etc.

    Add to that the fact that Romney donates some 30% of his income to charity (yes it may be a Mormon charity, but a charity it is), and he turns out to not only pay a lot of tax but also to donate very significant sums to charity on an annual basis. And I may be wrong, but I believe he doesn’t even claim the charitable donations as a tax deduction, which is something he could do.

    I wonder if one of his principal accusers, Harry Reid, the long term Senator from Nevada, would like to actually release his tax returns. Harry is pretty well known for making large amounts from real estate deals that seem to, well, just fall into his hands via people who otherwise benefit from the “pork” that Harry brings to Nevada. He’s so lucky that he’s managed to amass a $10 million estate just on the salary of a Senator, which is quite remarkable, on the face of it.

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  28. cha (3,856 comments) says:

    It’s someone else’s never ending war Tom.

    http://www.fas.org/sgp/crs/weapons/R42678.pdf

    In 2011, the United States ranked first in arms transfer agreements with developing nations with
    over $56.3 billion or 78.7% of these agreements, an extraordinary increase in market share from
    2010, when the United States held a 43.6% market share. In second place was Russia with $4.1
    billion or 5.7% of such agreements.

    [...]

    In 2011, Saudi Arabia ranked first in the value of arms transfer agreements among all developing
    nations weapons purchasers, concluding $33.7 billion in such agreements. The Saudis concluded
    $33.4 billion of these agreements with the United States (99%).

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  29. Bevan (3,965 comments) says:

    Pointing out that fish-boy has confused the income tax spend with the total spend.

    Ahhhhh -carry on.

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  30. tom hunter (4,564 comments) says:

    If you want to have indulge in some Black Comedy on this matter you could always go to this little interaction in Congress some months ago between Obama’s Treasury Secretary (and former head of the NY Federal Reserve), Tim Geithner, and current GOP VP nominee, Paul Ryan:

    At the House Budget Committee on Thursday, Chairman Paul Ryan produced another chart, this time from the Congressional Budget Office, with an even steeper straight line showing debt rising to 900 percent of GDP and rocketing off the graph circa 2075. America’s treasury secretary, Timmy Geithner the TurboTax Kid, thought the chart would have been even more hilarious if they’d run the numbers into the next millennium:
    “You could have taken it out to 3000 or to 4000” he chortled, to supportive titters from his aides. Has total societal collapse ever been such a non-stop laugh riot?

    “Yeah, right.” replied Ryan. “We cut it off at the end of the century because the economy, according to the CBO, shuts down in 2027 on this path.”

    Well, to be more precise the CBO’s model of the US economy shuts down in 2027, but they’re not that far out – at least not as far out as the debt parameters that caused the model to collapse.

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  31. Yvette (2,744 comments) says:

    Ed Snack – Yvette, how to lie by omission lesson 101.
    _________

    Read what I wrote – ‘guesstimated’. ‘appeared’ and ‘reputed’, before you accuse me of lying
    Plenty of room for question, as you have
    But I have seen articles bemoaning how little tax corporations pay, and a major attack on Romney relates to his own tax payments
    But your illumination is most welcome

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  32. hinamanu (2,352 comments) says:

    States are advocating ‘nullfication’ of the federal govt. Keep Washington in Washington.

    Another term for annexation which started the civil war.

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  33. lastmanstanding (1,241 comments) says:

    No No No DPF How many times do I need to tell you that the 3 Davids have the answer to our currency problems. All we have to do is elect a Labour/Greens/NZ1/Mana government in 2014 and all will be fixed. With David P as Min of Fin and Luigi back in his old post of Treasurer the Kiwi will move to its righful position of 20cent/US$.

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  34. tom hunter (4,564 comments) says:

    It’s someone else’s never ending war Tom.

    Sure Cha – and if the USA shut down its “military industrial complex” and the US military 100% it would buy what – an extra half-decade of Social Security+Medicare?

    The point – as you sadly know of course – is that while military expenditure has shrunk as a proportion of GDP and the Federal budget – Medicare has grown faster than the US economy for 40 years straight. I think it’s something like 8% per year (will have to look it up). From 10% of NASA’s budget in 1965 to 35 times NASA’s budget now.

    You’d think that alone would cause people to stop moaning about “America’s misplaced priorities”, as they were when those 60′s comparisons were made, but no.

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  35. grumpyoldhori (2,416 comments) says:

    So if Romney wins what will he do. he has said he will not raise taxes, he has stated he will put more money into the US military.
    Sorry medicare people on social security but you are fucked, will we be seeing boat people from the USA ?

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  36. hinamanu (2,352 comments) says:


    Sorry medicare people on social security but you are fucked, will we be seeing boat people from the USA ?”

    No. Martial law and FEMA internment camps

    http://weeklyworldnews.com/headlines/37662/mayor-bloomberg-looters-will-be-put-in-internment-camps/

    where did internment camps come from all of a sudden ????

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  37. bhudson (4,736 comments) says:

    My understanding of the situation is they the size of the annual deficit is roughly equal to the amount of tax deductions claimed. </blockquote.

    Which actually translates as" "We don't need to spend less. We need to tax [the rich] more."

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  38. Ed Snack (1,797 comments) says:

    OK, sort of sorry Yvette, but the whole claim about Romney’s taxes is a Democratic party talking point, and that talking point is based on “a lie by omission”. And it’s actually quite easy to find out about the lack of imputation on company tax, if you want to.

    I’d add to this by saying that the NZ mechanism of imputation credits carried on dividends is a good system; you get a credit to the extent that the company pays taxes. So if the company gets the benefit of some particularly large tax allowances so it doesn’t pay any tax in a given year, then you as a shareholder do not get any imputation credits. So in the US, if a company pays 35% tax and the shareholder gets a dividend and pays another 15%, that’s a 50% tax; whereas if the company pays, say, zero tax and the shareholder pays 15%, that’s 15% tax. In NZ, the combined tax will always 30% as in the second case there would be no imputation credit so the taxpayer would pay all the tax. This of course assumes that one “likes” company taxes, there’s at least a reasonable argument to make corporations tax free and just tax the shareholder distributions, for domestic shareholders at least.

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  39. Australis (100 comments) says:

    There is a fourth option – grow the economy at a cracking 4% per annum, which will automatically increase tax receipts to the point that they overtake the entitlements.

    The problem is that you can’t get growth if you increase taxes (as % of GNP). So this is an alternative to option 1.

    It’s also impossible to get growth if you follow a Green Party philosophy saying growth uses too many resources, and the goal is to decrease energy use and fight climate change.

    Then there’s the fifth option – print more money (another GP goal).

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  40. hinamanu (2,352 comments) says:

    Our national debt, if measured in gold, is larger than all the gold that has ever been mined on Planet Earth. As a solid gold cube, our current debt would be 80 feet tall by 80 feet long by 80 feet wide. All the gold ever mined in world history would only make a gold cube of 66.1 x 66.1 x 66.1.

    Rand Paul

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  41. tom hunter (4,564 comments) says:

    I think it’s almost always better to make points with humour, so in this context you should all have a read of the great satirist, Iowahawk, and his take on paying for US goverment spending (Federal level only): Feed Your Family on $10 Billion a Day.

    A couple of choice parts:

    12:01 AM, January 1
    Let’s start the year out right by going after some evil corporations and their obscene profits. And who is more evil than those twin spawns of Lucifer himself, Exxon Mobil and Walmart? Together these two largest American industrial behemoths raked in, between them, $34 billion in 2010 global profits. Let’s teach ‘em both a lesson and confiscate it for the public good. This will get us through…

    9:52 AM January 4
    Okay, maybe I underestimated our take. But we shouldn’t let Exxon and Walmart distract us from all those other corporate profiteers out there worth shaking down. In fact, why don’t we grab every cent of 2010 profit made by the other 498 members of the Fortune 500? That will net us another, let’s see, $357 billion! Enough to get us to…

    2:00 AM February 9
    So we’re running out of corporate cash, but look – it’s Super Bowl time!

    You’ll be glad to know that Iowahawk does indeed close the deficit gap by December 31st – with just one slight problem.

    See? Easy peasy lemon squeezy. Time to do it all again, except this time we’ll need to come up with $11 billion per day. I’m sure we’ll figure it out somehow.

    Do you know where we can get some more plutocrats?

    I’ll bet fish_boy knows the answer to that question.

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  42. TheContrarian (1,082 comments) says:

    I hope hinamanu knows that Weekly World News is not a reliable source.

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  43. Fletch (6,148 comments) says:

    Basically Obama has led the U.S right into the shitter.
    Some would say that is what he planned to do.

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  44. SPC (5,473 comments) says:

    The IMF is already onto it.

    No problem bailing out the banks, nor with Eurobonds taking over nation state debt of Europe, nor with financing the US government despite its deficit.

    http://www.telegraph.co.uk/finance/comment/9623863/IMFs-epic-plan-to-conjure-away-debt-and-dethrone-bankers.html

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  45. Griff (6,995 comments) says:

    Fletch
    Has Obuma been that effective I was under the impression that he actually managed to do very little.
    Of course it’s not like he was handed a poison economy and two wars or any other results of the previous regime is it. :roll:

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  46. SPC (5,473 comments) says:

    The real horror is that one candidate is to cointinue with the policies that led to the problem – trying to be a global military power while cutting taxes.

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  47. Fentex (909 comments) says:

    This post on TechDirt summarises an interesting effort by Planet Money to see what’s politically possible in changing economic policy in the U.S.

    Planet Money gathered a group of economists of varying political allegiances and asked them for a list of things they could all agree on as better economic policies. And then considered how possible it might be to enact these presumably ‘non-partisan’ improvements.

    The conclusion (I haven’t read Planet Money’s original source) apparently is that embedded interests make it impossible, even though it is presumed by the authors that the cross spectrum ability of economists to agree on them suggest they’re fundementally sensible ideas.

    I think the idea is to suggest that sans emergency ain’t nothing going to be done, that the political situation is first the economy has to go over a cliff before radical change can occur.

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  48. pq (728 comments) says:

    for a coherent and graphic display of Obama costs being
    11 trillion dollars during his presidency,
    that is twice the debit he received
    go here

    paulscottfilms.blogspot.com

    copy and paste.tested

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  49. pq (728 comments) says:

    USA Obama costs 10 trillion dollars

    Subject USA National debt. Facts just the facts, some reality within the poster campaign.

    The total increase of the USA National Debt in four years of Obama Presidency is 5 trillion dollars, up from 10.6 trillion at the end of the Bush Presidency to nearly 16 trillion now.. That’s a staggering Obama cost of an extra 16,000 dollars, in four years for every man woman and child in the USA. Those slogans and rhetoric are costing plenty
    Obama inherited difficult times ahead from recession and war costs, but this is insane. In spite of his words to the American people that he would reduce the deficit [ annual increase in debt ] by half in his first term Obama has increased that debt famously.
    Obama is set to increase the debt another 5 or 6 trillion dollars in the next four years ,as you can see by the graph, effectively doubling the total debt from 10.6 trillion dollars when he took over, to 21 trillion or more .

    In effect the Obama legacy will be that he doubled the National USA deficit, adding over ten trillion dollars, adding a debt for every person in USA of $USA 30, 000 and $60,000 if you happen to be a taxpayer.

    Remember if you read figures in Google there are many sites which will distort the expenditure. For instance many Obama figures will compare his debt favourably after 700 – 1000 days or so to Bush at 2922 days.
    Simple arithmetic from the present position will tell you Obama is set to do a lot more damage yet to the USA economy, 5 trillion more .

    Now many people will tell you all this is rubbish, don’t believe the figures even, because its all Bush’s fault, it’s the economy stupid, Bill Clinton said so, we saw the placards and the slogans and we don’t believe the facts , and anyway the other people hate gays and women.
    Pay here dudes.
    Pay your $35,000 here emotional slogan followers.

    To some extent it wouldn’t matter who had been President, even if the Democrats had had the intelligence to make Hillary Clinton President, there was a fall out to come .
    As it is instead of inheriting the Bush 10.6 trillion debit, she will inherit the Oama 20 billion debit, in 2017.
    Obama can not walk on water, and he is drowning the US economy, he will be remembered for crashing that economy, and doubling the total public debt within his presidency.
    If these facts were not and they would not be if Hillary Clinton had been president, Romney would have been laughed out of Florida, and Virginia in a landslide back to the Clinton house . This was the election the Republicans couldn’t lose but did.

    GDP Many people like to compare public debt alongside GDP . I have included this in the graph above
    The greatest increases in rate of deficit [ yearly debt ] against the GPP [ gross domestic product ] have occurred in war times. Specifically the second World War, Reagan’s Star War campaign and the Iraq and Afghanistan War. The Vietnam war does not seem to feature.
    The graph with deficit against GDP shows Reagan was extraordinarily expensive, and so too was George Bush 2 , but nobody, nobody compares with Obama on the matter of spending .
    There are references below for further.

    Presidential debt
    http://www.skymachines.com/US-National-Debt-Per-Capita-Percent-of-GDP-and-by-Presidental-Term.htm

    USA national debt clock
    http://www.brillig.com/debt_clock/

    USA debt by President
    http://useconomy.about.com/od/usdebtanddeficit/p/US-Debt-by-President.htm

    Presidential increase in debt, buy Obama records only till Jan 2011. 755 days
    http://www.thestreet.com/story/10959884/1/national-debt-a-look-at-presidents-tabs.html
    Posted 1 hour ago by paul scott

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