![\"Detroit\u2019s](\"http:\/\/www.profitconfidential.com\/wp-content\/uploads\/2013\/06\/240613_PC_leong.jpg\" "\\"Detroit\u2019s")
<\/a>Originally published in<\/em> Investment Contrarians<\/a> on June 20, 2013<\/em>.<\/p>\nDebt is deadly, and it\u2019s made even worse with rising interest rates that can prevent you from eliminating the load. What happens with rising interest rates is that more of the payments go toward the interest and less to the principal. In fact, it\u2019s what I call a death spiral of debt that worsens as rates move higher.<\/p>\n
When individuals face excessive debt, often the solution is to reduce spending and adhere to a strict repayment program.<\/p>\n
When corporations face excessive debt, they tend to streamline; but they must be careful when they do so, because any cost-cutting could impact the company\u2019s growth. What generally happens is more debt or credit is issued.<\/p>\n
But when governments build up massive debt loads, there is no definitive solution, and it becomes problematic. The national debt<\/a> is estimated to reach $17.55 trillion by the end of this year, while the country\u2019s total debt, including federal, state, and municipal debt,\u00a0is earmarked at $20.54 trillion. (Source: USGovernmentDebt.us, June 18, 2013.)<\/p>\n Congress and Obama must resolve the national debt limit.<\/p>\n Take a look at the chart below of the national debt from 1970 to today (blue bars), and the projected national debt to 2018 (red bars). What\u2019s made clear from this chart is not only the steady buildup of national debt but the rate of the buildup since early 2000, especially following the Great Recession in 2008. It\u2019s obvious that the national debt is spiraling out of control.<\/p>\n Chart courtesy of www.USGovernmentSpending.com<\/i><\/p>\n Despite the popular adage \u201ca picture is worth a thousand words,\u201d this chart of the national debt can be defined by one word: debt.<\/p>\n That\u2019s why the Federal Reserve<\/a> and the U.S. government must deal with the country\u2019s massive national debt load\u2014and how it\u2019s getting out of hand.<\/p>\n But not only is the national debt an issue, the debt buildup at the state and municipal level is also a major concern. By the end of this year, the debt amassed by the state governments is estimated to reach $1.19 trillion. (Source: Ibid.)<\/p>\n What\u2019s alarming is that the municipal, state, and federal governments will inevitably be subject to a cash crunch when yields and interest rates ratchet higher.<\/p>\n As I recently mentioned in these pages, we\u2019re seeing debt issues in many states that are vulnerable to rising interest rates, and not only with the federal debt.<\/p>\n Recall that California and its municipalities have accumulated a debt load of about $848 billion,\u00a0which could eventually be eclipsed by $1.1 trillion, according to The California Public Policy Center. (Source: \u201cReport: California\u2019s Actual Debt At Least $848B; Could Pass $1.1T,\u201d CBS web site, May 1, 2013.)<\/p>\n And then this past Monday, we found out that the city of Detroit, which has been ravaged by decades of slow growth and major population decline, has run out of money after defaulting on roughly $2.5 billion in unsecured debt. The city is trying to convince its creditors to accept $0.10 on the dollar to eliminate this debt. (Source: Williams, C., \u201cEmergency manager: Detroit won\u2019t pay $2.5B it owes,\u201d Associated Press, June 14, 2013.)<\/p>\n But the problem won\u2019t stop there, because Detroit will need new funds to survive, and based on the city\u2019s default and low credit rating, the cost of the loan would likely be significant.<\/p>\n So, while the stock market rises to new records and new millionaires surface each day, the real problem will be when rates move higher and debt payments become unmanageable.<\/p>\n I would start to take some profits off the table, or move funds into more defensive sectors.<\/p>\n![\"Gross](\"http:\/\/www.profitconfidential.com\/wp-content\/uploads\/2013\/06\/Gross-Public-Debt-Chart.jpg\")
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