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Two types of “debt” are measured: national debt and total debt. National debt is the financial obligation that has been created, over the country’s history, by spending more over time than is collected in tax receipts (viz., accumulated deficits). This is the “visible” debt metric we see in the news. Total debt includes the National debt as well as debt which we are obligated by law to pay, but has not yet been incurred (i.e., social security, Medicare for Baby Boomers who have yet to retire but will). This is the “invisible” debt metric the politicians do not want the American people to see.
While National debt ($16.2T as of this writing), in and of itself, is problematic and a current concern, the fact is the Total Debt ($58.6T) is a true measure of the larger problem that must be solved. Fortunately, for the American citizen, these metrics can be accessed at http://usdebtclock.org.
So why should you care? If you have a family, the total debt per family, as of this writing, is $702,000. This represents future benefits which the government has promised you and the rest of America and must be paid for through either taxes or borrowing. So let’s assume: (1) the debt is fixed (it is not: it was $684,000 in July 2012 when the billboard advertisement was placed and $702,000 as of October 28, 2012); (2) your family has to pay for its portion of the debt over the next 20 years (one generation); and (3) the interest rate is at the current rate of about 3%, compounded monthly. In this case, your family will have to pay $3,884 dollars per month or $932,160 over 20 years!
Does that sound like a scenario for which you are ready to sign up? Well, then you won’t like the real scenario. The average interest rate on the debt since 2000 has been approximately 4.7% versus the current rate of approximately 3%. Under this interest rate scenario, your family will pay $4,499 per month or $1,079,932 over the 20 year period. Your share of the debt just grew approximately $148,000. Do you believe interest rates are not going to increase? I don’t.
To make my point, the median family income in the United States (viz., half of the families in America make more than this and half make less) is approximately $50,000. This means that under the most reasonable scenario (4.7% interest), the median family (before taxes) will have to pay ALL of its income (and a little bit more) to simply amortize its share of the debt that will be incurred to pay for the family’s benefits that have been promised to them by less than forthright politicians.
The obvious question is “if this is not a sustainable path, how have we made it work to date?” Good question.
First, we do it through promotion of egalitarianism and progressive taxation, promising benefits to all people but shifting the burden to pay from those who cannot (viz., the bottom 50%) to those who can (viz., the top 50%). This works for a while until those who vote for a living outnumber those who work for a living. When this point is crossed, those who vote can always demand more services, for which they are unable to pay. At some point the so-called “rich” cannot pay either, less money is invested to grow the economy and more to support social programs. The system collapses. I believe our country is close to this point. Fifty-three percent of Americans pay for 100% of all income tax collected. That means 47% pay no income taxes (the taxes that pay for defense, all government with the exception of entitlements, and interest on the debt), but enjoy all the benefits of a free society. Is that ethical? Is that fair? This question is clearly a subject for another blog.
Second, we can borrow money from our children by placing the debt on them or borrow from foreign governments, which over time will demand higher and higher interest rates to service a debt that they perceive to be at risk. Can you say Portugal, Italy, Greece, and Spain?
Last, when all of the above does not work, the government prints paper money to pay off current obligations (i.e., TARP, quantitative easing, et cetera). This paper money has no intrinsic value because its creation is not associated with the creation of a product or performance of a service that adds value to the economy. Its ultimate effect is to devalue the currency. Your 401K and savings are worth less. In fact, as the printed currency enters the economy, you have more “dollars” chasing the same level of goods and services, and if not controlled, can lead to inflation and increased interest rates, further exacerbating the downward spiral of the economy.
Electing a new president is not going to magically eliminate these problems. However, the first step in solving a problem is to recognize you have one. The current administration either does not recognize a problem exists, or it does not care. In either case, my solution is to eliminate at least one variable by replacing the current President with someone who has an actual track record of dealing with large company, big program financial turnarounds.
Vote November 6th.
