But that gap began to widen under Bush 43, who cut taxes while starting two wars, bolstering homeland security, adding an expensive prescription drug benefit to Medicare, and increasing other spending. In 2007, the federal deficit stood at $161 billion, or 1.2 percent of our economy. In 2008 it was $455 billion, or 3.2 percent. In 2009, figuring in the billions spent to pull our economy out of recession and on various bailout efforts, the deficit rocketed to about $1.42 trillion, 9.9 percent of our economy.

In Washington, they speak of our "fiscal exposure" - the sum of all the benefits, programs, debt payments, and other expenses that will cost us big bucks in the future whether or not we want to cut spending. The term I've used for all of that is our "federal financial hole." In the first eight years of this century it has grown from $20.4 trillion to $56.4 trillion - a 176 percent increase.

Maybe you have a few bills - mortgage payment, auto loan, cable TV, phone - deducted automatically from your checking account. How would you feel if those expenses had risen 176 percent in eight years while your income remained steady?

The hole is getting deeper because we are doing little to bring our income into line with our spending. And until now I haven't even talked about the interest payments on our federal debt. Suppose our government fails to increase federal revenues above the current rate. Based on the GAO's latest long-range alternative budget simulation, within about twelve years, our interest payments will become the largest single expenditure in the federal budget. By 2040, all of our federal tax revenues will add up to enough to cover only our two biggest expenses: interest on our debt and Medicare and Medicaid. Everything else - Social Security, defense, education, road building, you name it - will fail to be funded.

As you know, benefits payments are the biggest chunk of the government's massive obligation. Since the 1960s, the growth of these mandatory payments has overtaken what we spend on defense as a share of our national output - and what we spend on everything else in our federal budget, from law enforcement to border protection, children's programs to national parks, highways to foreign aid.

Although defense has declined dramatically as a percentage of the overall federal budget over the past forty years, we have actually increased total defense spending. In recent years, we have added resources to fight terrorism abroad. That means that other discretionary programs are much more susceptible to cutting. These include education, research, transportation, infrastructure, and other programs that, if properly designed and effectively executed, can promote economic growth and development. How will squeezing those areas serve to keep America great?

All of this puts us in a major-league quandary. Our nation has to bring what we earn into line with what we spend at a time when our spending literally is out of control. One option - cutting investments in America's future in order to finance our large and growing mandatory spending programs - is another way of cheating the next generation. Unfortunately, today we are both cutting our investments in the future and handing our descendants a mountain of debt. That is a double whammy for young people and the unborn. It's not just irresponsible, it's immoral and downright un-American.

David Walker
for The Daily Reckoning Australia

• Lying Heads of the United States Congressional Budget Office
• Cleaning Up America’s Fiscal Policy
• Federal Government Making Taxpayers Pay Taxes for Nothing
• Obama and the $3.8 Trillion Budget
• Obama: One of the Great Men of History?

"Last night following the Ravens/Steelers game (ouch! What a game!), 60 Minutes covered what they called, 'The Second Mortgage Disaster on the Horizon'.

"That's right. Looks like the mainstream media is finally picking up on something we've been covering in these pages for over a year now: Alt-A and option ARMs.

"For those who are new to the game, Alt-A and option ARMs are two other types of exotic mortgages that have been lurking in the background, while the rest of the country worries about subprime alone.

"Although these loans were made to people with higher quality credit, these types of loans, specifically the option ARMs, still lured borrowers in with 'low teaser rates.' The problem with these rates, however, is right in the description...they are just a 'teaser'. Eventually, they reset. And a mortgage that was $800, can shoot up to $1,500...and many homeowners are ill-equipped to deal with this. In fact, one out of every ten homeowners in the United States right now is behind in their mortgage payment.

"Back in September of 2007, Strategic Short Report's Dan Amoss warned, 'The housing market will remain sluggish far longer than most expect. $800 billion of ARM resets can only add to the supply of distressed sellers in 2008. This will further depress an already sluggish housing market that's having enough trouble working through a huge supply overhang.'

"And we are nowhere near the end of the pain that will (and is) being felt from the rate resets and subsequent defaults. Whitney Tilson, the fund manager that 60 Minutes interviewed for this story gave viewers this uplifting tidbit:

"'We had the greatest asset bubble in history and now that bubble is bursting. The single biggest piece of the bubble is the U.S. mortgage market and we're probably about halfway through the unwinding and bursting of the bubble...It may seem like all the carnage out there, we must be almost finished. But there's still a lot of pain to come in terms of write-downs and losses that have yet to be recognized.'"

All we can tell you, dear reader, is get ready for the long haul. And do your best to stay ahead of the game. Not to toot our own horn, but your dedicated editors, both at The Daily Reckoning and at Agora Financial as a whole, have been diligently warning of this meltdown and the consequences it brings for the global economy for the past few years. And those who heeded this advice have been positioned to profit in a time when most investors are losing their shirts...and there is still time to join the ranks of this group of savvy investors.

Until tomorrow,

Bill Bonner
The Daily Reckoning Australia

• Subprime Loans Caused the Initial Illness, Option ARMs will Cause the Relapse
• Underwater Homeowners Continue Making Mortgage Payments
• Subprime Meltdown Has About Run its Course
• Mortgage Crisis: Shark With an Appetite
• Another Big Wave of Foreclosures