Ticking Time Bomb: National Debt

If I had a cartoon for this post today it would show the leaders of both parties smiling merrily with gifts extended in right hands while the left hands were plunging a dagger into our collective backs.

Recall last December when champagne corks flew and Congress declared it had come together in a great spirit of compromise to save the nation? Despite years of acrimony and accusations, these folks came together on the eve of the next presidential election and selflessly compromised by removing lids on spending while keeping most temporary tax cuts in place. Selfless? Ha ha. These elected officials realized that voters are not buying government standoff and they basically made Santa looks like a piker when it comes to distributing brightly wrapped gifts for all. On Dasher. On Dancer. Ho Ho Ho.

Well, the Congressional Budget Office (CBO) got around to estimating the budgetary implications of the 2016 Compromise Bill and they are not pleasant. In fact I think it is safe to say that we have finally arrived. We have finally arrived at the point of no return, the proverbial rock and hard place. We are out of bullets, yet our emboldened leaders are bribing and drugging us as they take us to the brink

Let’s suppose you go to Bank 1 and get a loan for a car. Then you go to Bank 2 and get a loan for another car. Bank 3 helps you buy a house and Bank 4 lends you money for your education. At some point it becomes pretty clear that even if you graduate at the top of your class with your coveted degree in Tiddlywinks, you will never have enough money to pay back these loans. Then you get sick and need to borrow money for expensive medicine.The next Bank says no way Jose. And your name is not even Jose. 

You explain to Mr Banker how much you need the money and he says no again. So you decide to reduce your spending on guava jelly and even with relatively large cutbacks on Jiffs Extra Crunchy Peanut Butter, you still can’t pay your existing loans much less the new one. So you ask your boss for a raise and he gives you 10% more. Hmmm…still not enough. Not nearly enough.

Stop crying Charlie. It is just an example. This example is silly Larry stuff but it makes a simple point. It is possible for a person or a country to have so much debt that there are no good solutions to their problems. Greece, Venezuela, Argentina, and dozens of other countries now and in the past have hit those limits and the results are both clear and tragic. At the point that the tragedy becomes known we all get very interested. We start asking questions – how did we get ourselves into this situation? What can we do to make things better?

The sad thing is that it is too late to ask those questions. The time for those questions was BEFORE things got so bad. BEFORE is when you can make adjustments. Those BEFORE adjustments are painful but they are nothing like the harsh boot on your neck when the creditors come after you…and then desert you.

Many of you are betting on just how many JDs I consumed tonight. But I am pretty sober and I am not exaggerating this mess.  What is so bazaar is that the US is now in a tragic budgetary position and these people running for office do not even have a clue. I will show you CBO projections below that are alarming. But the sad thing is that no one has picked up on it. No one and no party is debating this issue. Worse – many of these government folks want to legislate even more spending when they get back together later in 2016. Wow.

Here are some facts from the CBOs latest budget projections (cbo.gov):

·        From 2000 to 2007 government debt held by the public averaged around 34% of GDP. Let’s call that normal. In dollar terms the debt averaged around $4.2 trillion.

·        Largely because of the recession of 2008/2009, the debt increased to $13.1 trillion or to 74% of GDP by 2015. Let’s call that a huge increase but partly explainable by tough times.

·        After the 2015 Budget Compromise the debt is projected to rise to $16.9 trillion in 2020 or 78% of GDP. By 2026 the corresponding projections are $23.8 trillion and 86% of GDP. Let's call that criminal neglect.

·        If I am doing my math right, in 20 years, US government debt held by the public will have grown from about $4 trillion to more than $23 trillion. That’s a roughly six-fold increase. Notice it grew much faster than the economy as the share of debt will have gone from 34% of GDP to 86%. 

How do we get debt back down to something normal like 34% of GDP? How do I fit into my wedding suit? Not easily!  In the meantime, what happens if we have another recession and the debt goes to more than 100%? What happens to interest expense and debt when interest rates return to normal levels? How do we get back to something even approximating “normal” debt? Our so-called don't even talk about it. Instead they are boldly advancing plans to increase spending (free schools, more free healthcare, more submarines, etc) or looking for the lucky beans that will raise revenues (on the other guy) or magically increase output. 

Why isn’t hell already breaking out? There is a simple answer. For the time being problems elsewhere make us look okay by comparison. We survived the world recession better than most countries but part of the reason we did so well is that we went deeply into debt. Other countries had their own pluses and minuses – but right now many are in trouble. They won’t always be in trouble. And when they return to more normal conditions we will look much less good in comparison.

Japan and Europe will gradually improve. China will bottom and recover. Many developing countries will get pulled along when the developed world improves. As all this happens, our politicians will hope nobody looks too closely at US debt. As US debt pushes toward 100% of GDP or more and as better alternative investments arise, you can bet that US and global investors will shift their money to where in the world it seems safest. At that point there will be no easy fixes. We will feel the stupidity of policymakers who make us more and more vulnerable. It will be a mess. But our current batch of policymakers today is whistling their way to the bank. How do we get their attention?