U.S. Officials Say Debt Problem Worse than Believed

Debt problem

The U.S. Congressional Budget Office has just issued a warning that the debt situation has deteriorated considerably since last August. How much do we have to worry about this?

A trillion dollars is not an amount that people can easily get their heads around. This is why people break this down on a per-capita basis, where if we are the ones that would be paying this back, this would mean that a family of four is going further into debt by more than $12,000 every year, and this number is growing. We now owe over $23 trillion, where this $12,000 now becomes $276,000.

Although this does give us some insight, some may be more alarmed than others by this as the ratio to this debt to your income will vary, so we need to use the average household income of $62,000 to get a better reference point. This annual deficit represents 20% of our income already, and you don’t have to think too hard to realize that if you go in the hole by 20% of what you make every year, you are headed for disaster.

It’s even more enlightening to look at your share of the interest costs on this debt, which is now almost half a trillion a year. Without paying down a cent, this translates to almost $6,000 per year or about 10% of the average household income just to interest.

If we ever tried to take on this much debt, the entire amount of our income would be required to make payments on this in just 5 years, and we’re not even talking about making payments on the current debt, this is just to handle the extra and not make things worse. You can’t pay back more than you make of course, but we’re already at the point where everything we make is not enough to pay all this down, and we can’t give more than this whole amount because we just don’t have it, even if we figured out a way to live for nothing.

What is most interesting about these numbers isn’t so much the per capita or per family ones, it’s the growing percentage that interest is gobbling up from the national budget. In case this wasn’t enough to scare us though, this is just your share of the federal debt, and it doesn’t count state and local debt, which adds more to the burden.

Didn’t Donald Trump tell us that he would pay back all of our federal debt in just 8 years if we gave him the chance? If this were a Peanuts story, our response could only be to tell him that “you’re a blockhead Charlie Brown.” The fact that his tax cuts were supposed to be the magic potion makes this even funnier, and whatever their effect, the addition of over $3 trillion to the debt over the last 3 years isn’t exactly getting us even.

Cities and states will fall sooner than the federal government though, and one of the reasons is that people are considerably more willing to lend money to the U.S. Treasury than state or local governments, which means that the interest bubble will take longer to burst at the federal level.

When we realize that the end of the road is when governments lose their ability to borrow, turning their debt securities into junk bonds and beyond eventually, where rates skyrocket and the additional borrowing that they need to do just to keep up with climbing rates makes them climb faster.

We speak of other financial bubbles bursting, a housing market bubble bursting in 2008 for instance, or the bubble that burst with the stock market in 2000, but those are just little bubbles, tiny even compared to the one we’re talking about. This one will blow everything up when it bursts.

It’s not even easy to imagine what the level of devastation would be when the U.S. goes into default, and this is not a question of if as we have well passed the tipping point. Even if we wanted to try to beat back these flames, and were not so addicted to the level of government spending we see today, the fire has simply grown too large to ever get under control, and we’re left to watch it burn more and more and eventually burn down all our houses.

They used to say that the Social Security fund would be the first to feel this, with all of their assets now worthless, but we don’t have to worry about that anymore since we’re already at this point without the default. Those who wondered what Social Security will look like when it feeds itself hand-to-mouth are about to soon find out.

We Need to Put the Fiddle Away and See How Big the Fire Really Is

Just like the way that people’s finances can spiral out of control and come to its end with a big bang, this is exactly what the U.S. Treasury going down will look like. Borrowing will accelerate to a critical mass, and then will decline as borrowing capacity falls, as confidence in this goes downhill fast and rates move up like the hockey stick that people think global temperatures will end up like.

This is a real hockey stick though, and when we compare the risk of climate change with that of the coming financial apocalypse, global warming will only get us sprinkled on by a little rain, but a fiscal crash will be like a tornado in comparison.

At the point where the U.S. defaults, the interest payments that we have been collecting from their securities will simply stop. If we were only talking about half a trillion dollars a year worth of payments not being made, that wouldn’t be all that big of a deal. The real problem is that this number will be massively larger, because we have no choice but to fight this to the death and this number will be the maximum possible and explode once we reach this maximum.

This is not just speculation, it is a certainty, because we will indeed be borrowing for as long as we can to stay solvent, and just wait for the day when this well runs completely dry, without a drop left.

We do the same thing, we borrow to pay back interest until we can no longer do so and default, and then we become bankrupt, our creditors lose their money, and we have to start over. Perhaps this doesn’t sound so bad though, and people get through this without a huge amount of difficulty, so why can’t the U.S. government do the same thing?

If Social Security can live hand-to-mouth, off social security taxes alone, why can’t the U.S. government live hand-to-mouth as well? It’s tougher for Social Security recipients go get by with less, and it’s tougher for people to live off what they make, but shouldn’t we be doing that anyway?

The reason why this happening to the federal government is an entirely different situation is that only a segment of the population is affected in these other cases, old people or those who are terrible at managing their money, while we all go down with the ship with a U.S. default. This would bring the economy to its knees in a way that would make the Great Depression look like a temporary minor inconvenience.

It’s not that Americans will become extinct or anything, and this will actually affect the U.S. last, with every other country in the world bankrupt by this point, but the excess spending over and above revenue ending would be a bomb powerful enough in itself to destroy the economy many times over. It doesn’t take anywhere near this big of one to simply crush it.

This would simply be a financial doomsday, because with the economy decimated, they now need to get by on whatever tax revenue they can collect from a people now huddled around fires to stay warm. Their employers couldn’t stay in business, no one is paying you anything, and even if you have money, it doesn’t spend anymore, because the stores are all out of business as well.

Tax revenues plummet and government spending plummets even more. This is not a financial depression. It is the end of financial anything. We’ll devolve to the point where this will send us right back to the cave, in a land that can support only a tiny fraction of the number of people trying to survive in this apocalyptic frontier.

None of this is upon us yet, and we can keep the house from falling down for quite a while yet. We do tend to underestimate how quickly this will come up though, and we need to account for the amount of acceleration that our debt is under. This is not like seeing the debt rise by $17 trillion over the last 20 years and be thinking that we’re facing another $17 trillion over the next 20, as this number will be much larger.

There are real limits to how big this number can get, as there is only so much money out there that can be attracted to buying U.S. debt. We’re having no trouble at all rounding up an extra half a million more of borrowing each year, but what if this were 10 times bigger?

As we swallow up all the money from those who are open to buying treasuries, we then need to turn to those who would do it if we make it worth their while enough. As our hunger increases, we are forced to move higher and higher up the ladder. In the end game, rates act like a thermometer that you put a lighter under, with the mercury shooting up and exploding all over the place.

Nevertheless, this still does not place this doom on our doorstep just yet, and there will be plenty of warning when the temperature starts to rise. As seriously as we should be taking this though, and as scared as we may want to make people over this mega risk, we owe it to them to confine our scaring to the facts and not how the Congressional Budget Office (CBO) is doing it right now.

This is not about 2020 at all. This is completely business as usual right now, in a time where treasury rates are historically low. This is far from a cure for our debt problem, but it is a medicine that does improve the disease and can really extend our lifespan over a debt market that is placing us closer to the cliff.

The Ballooning Debt Does Not Hurt Us Now, But It Surely Will One Day

We want to make sure that we understand what goes on with this though to be able to think about the matter intelligently, and to hear the CBO tell it, we’re already getting smacked pretty hard by this problem. They are telling us that this debt is hurting our economy and is reducing people’s income.

Expanding debt maintains economic output at higher levels. It is when we try to reduce it that the economy becomes dampened as the CBD claims that increasing it does. They have this completely backward, and if we want to see the economy grow more, we just need to increase the debt at a higher rate.

They speak of this debt making the dollar suffer, but while it is possible that this might happen one day, that day is not today. The dollar remains strong, and we especially need to realize that this is all a relative thing, and as we see other currencies take bigger hits, we are positioned to maintain this strength for a long time.

Expanding debt reducing people’s income is also completely wrong. The ways that we put our debt up is to spend too much and to lower taxes. When governments spend too much, this increases our income, not decreases it. When taxes are lowered, this also puts more money in our pocket.

It is the fact that we are willing to pay such a huge long-term price to beat back economic decline is at the heart of the matter. We do get more value now for this, borrowing from a future that one day will have to be reckoned with. We might think this stupid, but it’s not so stupid that it harms us both now and later.

This is not all stick and there is a carrot involved, the one we’re munching on now. Carrots will be plentiful for quite a while, and we’re not entitled to misinform people into thinking we’re getting hit with a stick instead.

The CBO also say that they believe that we can “put debt on a sustainable path, lawmakers will have to make significant changes to tax and spending policies.” For this to be even possible, significant would require a massive amount of fiscal austerity, and this in itself would shrink the economy so much and tax revenue in turn that this could in itself take us into a downward spiral that may greatly hasten the end.

If we keep putting up the debt, we’re headed for the cliff, and if we try to pay it down, we are also headed to the cliff. It might not be pleasant to face the fact that there really is no way out, but it is better to face our problems with our eyes open rather than to turn away as much as we can.

In nominal terms, we need to spend a trillion less to even balance the budget, while the interest on our debt continues to eat up more and more of what we have to spend. The real effects of this, spending just a trillion a year less, would see a corresponding drop in tax revenue, in itself making the hole a lot bigger.

This forces us to spend even less, and we spiral toward the ground. If this is sustainable, this must mean that our demise will be sustained, and it would indeed sustain that.

Balancing the budget sounds like such a fine idea on its face, especially when you’re already being choked by debt, but this problem is a lot like your taking your foot off the accelerator as your tires lose air. We need to keep our foot on the pedal if we want our car to keep going, and keep our very leveraged economies very leveraged.

We manage our economies much like we manage our lives, looking to live happy for as long as we can. Reducing our happiness just wouldn’t go over very well anyway, so there is nothing to worry about this part at least, especially since we vote for those who make us happy and not those who bring us pain instead.

We know the party will end, and the best we may able to do is enjoy it while it lasts, and be particularly careful with how much we wish to cut. It’s fine to endure pain when you can see a way out, but an approach that starts out painful and just gets worse until we reach the inevitable end doesn’t make much sense.

This does not mean that there aren’t things that we can do to slow this down, by making cuts in defense spending for instance, ones that the economy can tolerate, which means bringing our fiscal and monetary policies together toward a common goal, where we would use fiscal cuts instead of higher rates to cool off the economy when this becomes desirable to manage rising inflation.

If we instead use cuts without an eye toward the economy, this is where we risk driving our economy into recession or worse. We only want to use fiscal restraint as a brake though and let the Fed’s foot to take care of the gas pedal when we need it, but stifling our economy by way of higher rates while spending rages on is like using both the gas and the brake at the same time, with our tires smoking without our really moving forward very much.

By trying to pretend that the direness of our debt doesn’t matter much, and especially if we dream of increasing spending to insane levels like Sanders and Warren would do if given the chance, in concert with their ideas of constricting the economy and the tax base by way of much higher taxes, this is simply a recipe for disaster all around.

This is no time for stupidity though with so much on the line. There are some great minds out there and we need to put their talents to use to man age this situation in a way that actually helps and not hurts, especially since the people we do put in these positions of power have done so much harm already, with no end in sight.

Ken Stephens

Chief Editor, MarketReview.com

Ken has a way of making even the most complex of ideas in finance simple enough to understand by all and looks to take every topic to a higher level.

Contact Ken: [email protected]

Areas of interest: News & updates from the Federal Reserve System, Investing, Commodities, Exchange Traded Funds & more.