Why the National Debt is a Bubble


In the previous post, I discussed the symptoms of a bubble and talked about some of the recent bubbles we’ve seen in the US.  Today I wanted to talk about another bubble that has been growing since about 1981 – that is the US National Debt.

Like other bubbles, the US debt is using credit – in this case in the form of government bonds and money created by the Federal Reserve, to create a false sense of wealth.  Just as homeowners used the rapidly growing value of their homes in the 2003-2008 period to buy all sorts of things, the government is using debt to fund programs, employ people, send money to other nations, and perform other functions.  The level of spending has become so large that things that once would have been thought of as extreme, such as the President travelling to Africa on a trip that cost more than $100 million dollars, are suddenly excepted with little opposition.

This spending has outstripped revenues brought in through taxes, with revenues equal to about $2.5 T and spending equal to about $3.5 T.  In 2014, revenues are expected to increase to about $3 T as the economy continues to recover (and inflation from the quantitative easing of the Federal Reserve devaluing the dollar), but federal spending is likely to increase as well to $4T or more.  This means that about 30% of the spending that occurs is with money that does not really exist.  In other words, about $1 T of the spending for services provided and goods purchased by the government cannot continue indefinitely.

Eventually, when the government is no longer able to borrow more, all of this spending will need to come to an end.  This means that there will suddenly be $1 T less spending in the economy.  The jobs for all of the people who perform those functions will vanish.  The people who are receiving some of that money from the government will stop receiving payments.  The suppliers who are developing things for the government on that money will no longer have a customer.  The castle in the cloud will fall back to earth, leaving people to wonder where it all went.  It could go on for a few more years, or even a decade or more, but it will burst eventually just as all bubbles do.

So when this happens, will it cause a nother Great Depression and send the whole world into depression as has been proposed?  Probably not.  Here’s why:

1.  While the amount that the government borrows and spends is a lot, is still not that much compared to GDP – about $1 T on a $18T US economy.  It is true that defense contractors will be hurt as some programs are cut and that others who depend on the government will have less to spend, but much of the economy will continue on as normal.  The fact is, in the US, unlike in the USSR, the economy really doesn’t depend on the government that much.

2.  The government will also still be able to do 70-80% of what it was doing before the bubble burst.  It isn’t like all spending on defense, highways, health research, etc. will disappear.  It will just be cut.

3.  Interest rates may increase for the government, since it will likely default on some of its debts, but this does not mean other consumer and business interest rates will rise.  In fact, rates on corporate bonds and other investments may fall as people leave government bonds for the relative safety of corporate loans.  Increases in the rates the US pays right now only cause other rates to rise because US debt is considered safer than corporate debt.  This would reverse as the government debt gets unmanageable.

So, like all bubbles, this one may continue to grow for some time and there is no need to panic.  It would be wise, however, to not be overly dependent on the government.  Federal workers should save and invest so that they have enough resources to tide them over until they can find other work when the bubble bursts.  Those who are on government welfare should develop job skills and get financially independent of the government.  Those approaching retirement age should make sure they save and build a large nest egg since Social Security will probably not be there, at least at current rates.

There is always money to be made while bubbles grow and they can continue to grow for a long time.  The trick is to keep yourself on firm footing so that when the castle collapses, you are on firm ground beside it instead of buried under it.

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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