Eating Our Young

Nothing really matters
Anyone can see
Nothing really matters, nothing really matters to me.
Queen, “Bohemian Rhapsody”

Our presidential candidates promise things they can’t possibly deliver. They propose programs that cannot be funded without massive deficit spending. They talk as if cost doesn’t matter. Their funding projections are wildly optimistic if not fanciful and impossible to achieve.

When I discuss the national debt with people I usually get a ho-hum—especially with anyone under 50. They think it doesn’t really matter, that it doesn’t affect them. They are in for a shock.

We have a huge national debt—about $19.5 trillion. To write it out, it is $19,523,360,000,000 (14 digits). Gross Domestic Product (GDP) is about $18.5 trillion, so the debt exceeds our economic output—for the first time in 50 years. As recently as 2008 the debt was only 65% of GDP.

According to USdebtClock.org, the debt amounts to about $163,000 for each taxpayer. The interest on the debt is $247 billion per year. Consider that average Americans have only about $2,000 in their checking accounts (4 digits).

The government spends about $3.861 trillion (this fiscal year). Its total revenue is about $3.275 trillion which leaves a deficit of $586 billion, which it borrows. This is why the national debt grows.

Medicare/Medicaid, Social Security, defense, welfare programs, federal pensions, and interest on the debt cost about $3.38 trillion this year. These are relatively fixed costs (except defense) which the government is obligated to pay. Based on what I hear from the presidential candidates is doesn’t look like the defense budget will be cut.

What is left over, almost $500 billion, is what the government has left to spend on everything else.

Whatever your political views are, debt is a problem, not a solution. Politicians don’t pay for it; we do. Suppose you have a lot of debt, like student debt, credit card debt, auto loan, your kids’ braces—whatever. You’ve got to pay the debt and it limits your ability to buy a house, to take vacations, to save money, to start a business. You have fewer options and it limits your opportunities. It’s not much different with the government.

The reality is that federal debt will never be paid off. It is just too huge. We have debt left over from World War 1 that is not paid off. So we taxpayers will have to bear the burden of our politicians’ profligacy – forever.

Since political sanity and fiscal restraint are unlikely to return to Washington, one can assume that spending will continue, and despite any tax increases, debt will grow and grow. People seem to think we can tax the rich and corporations to pay for it but that isn’t the case: there are serious unintended negative consequences if you do.

Here are some of the consequences of our debt glacier:

1. Interest rates on the debt are projected to rise. That would leave even less for the government to spend on things like national parks, FEMA (aid for natural disasters), education, sciences, aid programs to cities and states, climate change initiatives, freeways, and all the other federal programs. Like you, they have fewer options. Something has to give.
2. More debt and more taxes create a negative feedback loop. The more the government takes out of the private economy, less money is available for new investment in the things that create jobs and prosperity. The result is that the economy becomes sluggish and stagnant because most of the things government spends money on are economic dead-ends. Japan is the poster child for this. Their government debt is 229% of GDP and their economy has been relatively stagnant for the last 20 years. Their leaders seem to be panicking.
3. While the law says that the Fed cannot create money to buy federal debt, it is no secret that that is what is done. They’ve pumped $3.7 trillion in new money into the economy since 2008. It is called “quantitative easing.” The idea is to stimulate us to buy stuff and rescue the economy. QE has never worked anywhere in the world. What it had done is to inflate asset prices (stocks, bonds, and real estate) and neglect productive capital investment.

Banana republics print money to pay for stuff too. It usually ends badly. QE has pushed interest rates down to all-time lows. These artificially low interest rates distort everything in the economy. It’s great for Wall Street bankers but bad for savers like retired folks who rely on savings to live. Savings are what make economies grow. You’ve got to make money before you can spend it and that only comes from jobs which come from capital investment by entrepreneurs who create our businesses and paychecks.

Presently economic growth is trending down. Are we following in Japan’s footsteps—systemic stagnation?

This is the tip of the iceberg.

Debt is just one of the significant long-term, systemically threatening problems facing America. Social Security and Medicare funding deficits, public pension shortfalls, regressive tax policies, heavy-handed economic regulations, and clueless monetary policy all loom on the near horizon and there is no political will to solve them. One can assume these problems will only get worse.

It seems that everyone knows that you can’t borrow your way to prosperity, except politicians. Yet that is what politicians are selling us. They borrow today and don’t think about the future generations who have to pay for it in taxes and in declining standards of living. It is the equivalent of eating our young.