A Loss for the Country’s Future

Much was made of Obama and Harry Reid’s “victory” over the Tea Party and the Republican party after an agreement was made to reopen the government and increase the debt ceiling enough to continue to run up the debt for a few more months.  MSNBC and many newspaper editorial pages applauded the President for holding firm against a set of “financial arsonists” who wanted to default on the economy” and “hold the economy hostage.”  Lost on the pundits was the fact that most of the public didn’t really notice any effects from the government shutdown except for things like the closing of open air monuments, removal of drinking fountain handles from parks, and the condoning off of highway scenic viewpoints.  One has to wonder if any effect at all would have been felt if the employees who worked overtime to inflict this pain on the public were furloughed instead of being kept on the job with the instruction to “make things as inconvenient as possible.”

One also needs to wonder if the Executive Branch’s actions in directing these actions really helped them sell the idea of universal, single-payer healthcare.  After all, if you see spiteful actions like erecting barricades at the WWII memorial to keep veterans out because the Federal Government controls the national parks, do you really want to turn over control of your healthcare to them?  Who’s to say the hospitals won’t be closed and the patients evicted the next time there is a shut-down if hospitals become federally controlled?

What was truly tragic, however, was the failure of a discussion to emerge about the real issue.  It isn’t the scenic view points around Mount Rushmore or even the treatment of cancer patients or the burial of fallen soldiers.  The real issue is the national debt that cannot continue to grow indefinitely and the fact that we simply won’t be able to pay for all of the promises that have been made going forward.  It is important to discuss this issue now since many of those who will be affected will be elderly and unable to help themselves when the government if finally forced to fess up in ten to fifteen years.  Many of these individuals are in their fifties and sixties now and could continue to work and save aggressively, if only they knew the truth and were given the freedom to do so.

The current debt is about $17.0 T, which is about $9T more than it was just five years ago.  It is expected to be more than $20T in just a few years, which will be about 100% of GDP.  No country has ever been able to continue to  pay its bills and  continue to borrow with debt level that large.  Current debt payments are very manageable – about 7% of revenue – due to the low interest rates currently enjoyed.  This could change very quickly if the country got into financial trouble and interest rates spiked.  Unlike a home borrower, the US Government constantly takes out new loans and retires old ones, so interest rates are reset frequently to current rates.  If rates rose to 10% or more, most of what the government takes in from taxes would be required to pay interest on the debt.

Even worse than the debt on the books is the expected unfunded liabilities from Social Security, Medicare, and now the new Affordable Care Act.  The unfunded liability (payments minus income from Social Security Taxes) for Social Security is now estimated to be $16.6 T.  For Medicare, it is $87.5 T.  Including these unfunded liabilities, the debt now exceed $1 million per taxpayer.

If the US continues on the current path, it will eventually run out of the ability to borrow more money.  At that point, it will need to instantly cut expenses back to revenues.  The higher it’s debt to revenues ratio, the higher the interest rate it will need to pay on that debt.  This will reduce further the amount of money it has for things like defense, Social Security, and government payrolls.  It would be better if it started to curb spending now, while the population is younger and better able to adjust, than it would be to hit the financial wall and need to make drastic cuts with damaged credit.  Unfortunately, with all of the vitriolic talk of economic terrorism and hostage taking, this discussion is not being had.

Contact me at vtsioriginal@yahoo.com, or leave a comment.

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

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