My Response to “Anonymous” on National Debt

I received a comment to my blog post entitled "National Debt" from an anonymous reader. Call me long-winded, but I felt that it deserved a slightly longer response than was allowed for comments.

First, here is the poster's original comment:

5/31/2010 5:31 am - Anonymous said...
Money does not exist in nature. It has been created by government and is based on (in this case) other governments faith in our government. If other governments have so much faith in our government they want to give us goods for "free" because they trust we will pay them back at some point, why should'nt we take the goods? You relate the governments debt to an individuals debt, which is in fact a fallacy. When the music stops, we will be ahead still. Why is this bad that we are getting free goods from other governments again?

My response:

"Free?" What are we getting for free? Last year, the federal government paid $383 billion in interest on our outstanding debt. How is that free?

When you were young, did you ever get a savings bond for your birthday from some aunt or uncle you hardly ever saw? If so, what really happened was that old Uncle Charley loaned the government some of his hard-earned cash, let's say $25, with the expectation that his gift to you would be worth somewhat more than $25 when it (and you) matured. In fact, that $25 actually contributed to the national debt total. Also, every month that you've held onto that savings bond, the interest on the $25 (~1.2%) was been added to the national debt. Later in life, when you decide to cash in that savings bond, Uncle Sam will have to pay you the invested value of the bond in cash, let's say it's now $50, and the national debt will be reduced by that $50 (unless, of course, they have to go borrow that $50 from somebody else, which they will).

Our national debt is held by people (including many Americans), businesses, banks, retirement accounts, and other governments. All of those people have "invested" in the United States because they have faith that we will pay them back all of their money PLUS interest.

Try this. Loan me $1000 this week. Next week, loan me another $1000, and another $1000 the week after that, and so on. At some point, I'm willing to bet that you will become weary of our little arrangement and want to know exactly how I'm ever going to pay you back. How risky of an investment am I? Let's suppose that you knew me very well, and that I was loaded (which I'm not) and had a history of always paying back all of my debts on time with interest (which I haven't). You might feel comfortable loaning me all that money for a reasonably small interest rate. Or, perhaps you knew that I was broke and hardly ever paid people back on time. In that case, you might want a pretty large interest rate to offset the increased risk of you losing your money. On the other hand, what if you didn't know me at all?

Just like a bank can judge your ability to pay back loans by your credit rating given my credit bureaus (e.g. Equifax), bond issuers are rated by bond rating companies, like S&P (Standard and Poor's) or Moody's. Those companies set our governments' (federal, state and local) credit ratings. The lower the score the riskier the investment and thus a higher interest rate is warranted. The U.S government has always enjoyed a AAA rating (prime), the highest possible rating. However, one rating agency, Moody's, just released a warning that the US's AAA rating is in jeopardy due to our skyrocketing debt and fiscal policies. This means that it's going to become harder for us to borrow money and we will be paying higher interest rates when we do.

Drawing an analogy between government and personal finance is not a "fallacy" at all. I use the comparison to help people understand the problem. But it's more than just an analogy; because a government's financial state eventually impacts its citizens. Until 1971, our currency was backed by gold. For every dollar in circulation, the US Treasury had a dollar's worth of gold in Fort Knox or some other vault. We no longer have that security. The US dollar is now a fiat currency, and history, even very recent history, is littered with country after country with failed fiat currencies because of unsound fiscal policies and the printing of more and more money leading to hyper inflation. Take Zimbabwe for instance. In 1980, the Zimbabwean dollar was worth $1.59 USD. In just 10 years, it was worth only 38 cents. About a year ago, the Zimbabwean government issued a $100 trillion bill, which was worth only about 30 bucks at the time. Folks in Zimbabwe experienced prices of goods doubling every few hours. The monthly inflation figures are unbelievable in 2008, with values of 66,213% to 1,063,572% to over 10,000,000%. In fact, the 2008 annual inflation rate in Zimbabwe was 231,000,000%.

So if you think that we will be better off "when the music stops" and that somehow you will be unaffected, then my anonymous friend, you have your head stuck profoundly in the sand.

Show Me the Money

There are about 4,000 companies listed on America’s stock market exchanges, NYSE, AMEX and NASDAQ. Together their total market value is $13.3 trillion. That’s every publicly traded company in this country. That means for a cool $13.3 trillion you could own them all, every one of them, lock stock and barrel. http://www.wilshire.com/Indexes/Broad/Wilshire5000/Characteristics.html

You couldn't exactly pay cash for them because the U.S. Federal Reserve estimates there is only about 1.7 trillion dollars in U.S. currency and coins in the world. That’s every dollar bill that exists in the World! Most of that cash ($1.3 trillion) resides in U.S commercial bank vaults. That leaves about $400 billion in people’s pockets and mattresses. But that is just cash, how about checking, savings and money market account balances? Well, if you took all of the assets of all of the commercial banks in the U.S., including all deposit account balances, all of the cash in the vaults, and the current value of all residential and commercial real estate mortgages and consumer credit loans (e.g. auto loans, credit cards), you'd have $11.7 trillion. Of course, the banks have liabilities to their depositors and other bank, but I’m just counting assets. http://www.federalreserve.gov/releases/h8/current/default.htm#fn1

So, we have about $11.7 trillion in bank assets and about $13.3 trillion in stock value. That’s $25 trillion, altogeher. Remember that number for a minute.

I’ve written many times about our exploding national debt, so by now you should know that the debt is currently $12.5 trillion. Yes, our country owes more than all of the money that is in all of the banks in the country. By the end of this year, the debt is going to be 13.8 trillion dollars. Wow, that’s enough to buy every one of the publicly traded companies in the stock market. But, those alarming fact are not really the point of this post.

Last night, the U.S. House of Representatives passed the Senate’s Healthcare bill which will enact the greatest entitlement program this country has ever seen. Now, our record is not so good when it comes to entitlement programs. Our two biggest programs, Social Security and Medicare, are broke or will be broke in a few years. What most people don’t realize is, that the future payments that we are obligated to pay Social Security and Medicare recipients are not reflected in the national debt figure. In fact, over my children’s lifetimes (say the next 75 years), these programs will add $108 trillion to the national debt, that is assuming some fools ar still lending us money. What that means is we would need to put $108 trillion into a savings account today, earning interest, so that we would have enough to cover the shortages. Economists refer to this as an “unfunded liability.” In other words, we don’t know where we are going to get the money to pay for it. http://www.usdebtclock.org/

The truth is we can’t pay for it. Remember the 25 trillion dollars in our banks and stocks? That’s not going to cover it.  It's not even close.  We can't pay for the programs that we have now.  Those will have to stop, soon.  More importantly, we can't pay for any new ones, either.  Now do you see why I am concerned for my children?

The Saturday Morning Toast

I took my 4 year old son to eat breakfast this morning. Having three sisters, he appreciates the father-son time more than most. We went to eat at one of Marion’s iconic eateries, Richard’s Restaurant. It’s your typical greasy spoon that you can find in just about every small town in America. Richard Godbold has been a short order cook in Marion for over 50 years. He has been serving up good food for good folks at his present location since 1982. My father’s morning ritual always included breakfast at Richard’s nearly every day up until shortly before he died. I always enjoyed the times that he let me tag along.

We sat at the counter, looking up at the walls clad with old license plates and Route 66 signs from all over the country. Distinctive 1950’s music provided a faded backdrop to the sizzling griddle and folks going about their morning. Noah pointed to a colored-pencil sketch, reminiscent of Norman Rockwell, of a red 1955 Chevy hanging over the door. There’s just something about nostalgia that makes me proud to have been raised in a small town in America.

As we sat there eating our breakfast, Noah explored the limits of the swivel bar stools. He was grinning ear to ear and ever confident that his Daddy had the answers to all of his questions. “Why do these stools spin around?... Do they make baked potatoes here?... Does apple juice have seeds?”

It’s my hope that one day Noah will have fond memories of spending time like this with his father, as I do of mine. And, if he is lucky, he will be able to share similar experiences with his sons and grandsons and the tradition will perpetuate.

Staring into my plate of grits and eggs, I worried about the future that lies ahead for my son. One day, I may not have all of the answers for him. I’m concerned for our little town and our country. I feel that each generation is obligated to leave the country in better shape for the next.

When I was born in 1965, the national debt was only $322 billion. Today, it’s 38 times that amount - $12.5 trillion, and that number is expected to double in the next ten years. To some, the whole national debt issue is irrelevant. They feel that it doesn’t affect them and never will – It’s just something they ignore.

When I try to pay attention to national issues and things that are affecting our government, I hear, “You’re way too involved in that stuff. Why? There’s nothing you can do to change it.” But if not me or you, then who? Isn’t that one of the founding principles of this country - a government of the people and for the people? “The right to petition the government for a redress of grievances” and rest of the Constitution says it all. In America, the ability to affect change is not reserved for just noblemen or monarchs. The power lies within its people.

I had a fun, but spirited conversation with a good friend the night before about the healthcare bill and politics in general. He’s a moderate democrat who has had some experience in politics. I was amazed at how little he was concerned about our country’s financial situation. “We will never pay it back. So what?” he said. “(In Marion) we are on the receiving end.” To him, government spending is just a way that we can get a bigger piece of the pie. I do not agree. Nor do I agree with his misinformed rhetoric that it’s all Bush’s fault, and that Clinton left us a surplus. You see, this is a common misconception among democrats. It’s the deception that politicians portray when they use the terms “deficit” and “debt” interchangeably. My good friend is under the impression that the Clinton surplus was somehow over and above our total debt. You know, “We were paid in full, until Bush ran up the deficit.” LOL.

What really happened in the Clinton years (1993-2000)? Well, according to the Office of Management and Budget (OMB), Bill Clinton increased the national debt EVERY year he was in office, starting from $4 trillion in 1992 to $5.6 trillion at the end of 2000.

The so-called surplus years were actually annual budgets where our federal revenues turned out to be more that what we spent in that year. That’s a good thing. However, some of those revenues were from “off-budget” items, like Medicare and Social Security. Until recently, both Medicare and Social Security have taken in more in taxes than they have had to pay out in entitlements each year. This “extra” money gets immediately borrowed by the government, which adds to our national debt. That’s a bad thing. Right now, $2.5 trillion of our $12.5 trillion debt is owed to the trust funds of the Medicare and Social Security programs. The trouble with this is that the “off-budget” surpluses have been masking the “on-budget” deficits that have been occurring over and over and over. Folks, this will catch up with us. Our current track is unsustainable.

If we are to leave this country to our children in sound shape, we must act now. So for now, my part is to help educate people on the real situation. I will engage folks in conversation. I will write this blog. Do your part. Come November, go vote. Vote in the primaries. Support candidates around the country that will demonstrate fiscal responsibility. It’s time to put people in office that “get it.”

Noah and I finished off our breakfast and headed out of Richard’s Restaurant this morning. An Elvis song was just coming on as we walked out of the door. Noah grabbed my hand; his other hand was occupied, nibbling on his toast. It was my turn to grin.

Obama Wants to "Double Down" on Your Future

There was an article posted on Yahoo Finance today from Andrew Taylor of the associated press.  I've pasted the article below just in case this link to it becomes unusable.  In it, Taylor discusses a new report by the Congressional Budget Office (CBO), America's non-partisan financial watch dog.  In a nutshell, it ain't good. 

According to the Taylor article, it seems the White House has understated the impact of Obama's spending over the coming decade by about 14%.  Over the next 10 years, the CBO expects another $9.8 trillion to be added to the national debt.

So I decided to have a look at this report for myself.  The report contains a table that shows the revised annual budget deficit projections for the years 2010-2020.  Are they crazy?!?

George Bush, not the most thrifty person in the World, left the nation in debt to the tune of just under $10 trillion at the end of 2008.  If the CBO is correct, the Obama administration will have nearly doubled this debt by the end of his 2nd term (assuming he gets relected).  The true doubling point comes just 18 months after he leaves office.  By the end of 2020, the national debt is expected to be 23.14 trillion dollars.  We will be paying almost a $1 trillion a year on the interest alone by then. (CBO estimate of  interest in 2020 is $916 billion.)

Folks, this is no longer a partisan debate.  It's not about Democrats or Republicans.  It about our children's future. 


The article below is by Andrew Taylor, Associated Press Writer.

WASHINGTON (AP) -- A new congressional report released Friday says the United States' long-term fiscal woes are even worse than predicted by President Barack Obama's grim budget submission last month.

The nonpartisan Congressional Budget Office predicts that Obama's budget plans would generate deficits over the upcoming decade that would total $9.8 trillion. That's $1.2 trillion more than predicted by the administration.

The agency says its future-year predictions of tax revenues are more pessimistic than the administration's. That's because CBO projects slightly slower economic growth than the White House.

The deficit picture has turned alarmingly worse since the recession that started at the end of 2007, never dipping below 4 percent of the size of the economy over the next decade. Economists say that deficits of that size are unsustainable and could put upward pressure on interest rates, crowd out private investment in the economy and ultimately erode the nation's standard of living.

Still, the Feb. 1 White House budget plan was a largely stand-pat document that avoided difficult decisions on curbing the unsustainable growth of federal benefit programs like the Medicare health care program for the elderly and Medicaid, which provides health care to the poor and disabled.

Instead, Obama has created an 18-member fiscal reform commission that's charged with coming up with a plan to shrink the deficit to 3 percent of the economy within five years. But the Republicans to be named to the panel by congressional GOP leaders are unlikely to go along with any tax increases that might be proposed, which could ensure election-year gridlock.

"While the president is intent on ramming through Congress a new trillion-dollar health-care entitlement, he appears far less concerned with addressing the looming crisis of entitlement spending already on the books," said Rep. Paul Ryan of Wisconsin, the top Republican on the Budget Committee. "Instead, he delegates this task to a 'Fiscal Commission' -- which would not even report until after the next election."

The report says that extending tax cuts enacted in 2001 and 2003 under GOP President George W. Bush and continuing to update the alternative minimum tax so that it won't hit millions of middle-class taxpayers would cost $3 trillion over 2011-2020. The tax cuts expire at the end of this year and Obama wants to extend them -- except for individuals making more than $200,000 a year and couples making $250,000.

For the ongoing budget year, CBO predicts a record $1.5 trillion deficit. That's actually a little better than predicted by the White House, but at 10 percent of gross domestic product, it's bigger than any deficit in history other than those experienced during World War II.

The new report predicts that debt held by investors, including China, would spike from $7.5 trillion at the end of last year to $20.3 trillion in 2020. That means interest payments would more than quadruple -- from $209 billion this year, to $916 billion by the end of the decade.

Sources
http://finance.yahoo.com/news/Congressional-estimates-show-apf-2216760019.html?x=0
http://www.cbo.gov/ftpdocs/112xx/doc11231/03-05-apb.pdf

The National Debt

Santa left a very special present for us this past Christmas Eve. Our line of credit, as a country, was increased by $290 billion to a total of $12.4 trillion. If that wasn’t enough (and it wasn’t) the Ground Hog added another $1.9 trillion increase just six weeks later. Our new credit limit is now a whopping $14.3 trillion. Should we be concerned? At what point should we be? What happens if we can’t pay it back? Can I get one, too?

This reminds me of my first credit card that I received while in college. For some reason, that I never asked myself at the time, there were credit card applications left lying around in one of my classrooms. They had tale of some sort of free trip – to the Bahamas, I think. I applied for one and, to my amazement and delight, received a shiny new Visa with a $350 credit limit. Well, long story short (one new VCR and a couple of nights out with my fraternity brothers), it was maxed out. The first (minimum) payment that I made was for some absurdly small amount, like $19 or $29 – I can’t remember exactly, but it was one of the few that I actually made on time. What really surprised me was that after having the card for only just a couple of months, I asked for and received a credit limit increase to $500. Now, short story long, I had asked someone else a much different question the day earlier and she had said “yes.” Surprised at that answer as well, I found myself absolutely broke and unable to take her out. Not wanting to risk the embarrassment of having my credit card declined on our first date, I called the bank to determine my available balance… $4. After some quick math, I knew things didn’t look good. With nothing else to lose, I decided to “press ‘4’ to speak with a customer representative.” It only took a few minutes and an excellent presentation of the “facts” by me, I might add, and it was done. I had another $154 to blow. Eventually, that card (and that girl) got me in a bit of trouble and I learned a valuable lesson or two.

When will we as a nation learn our lesson? How much can we safely borrow?

Let’s get a few things straight. I am not against borrowing money. Obviously, circumstances will require you, your town, or your country to spend more money than it takes in over a given period of time. That’s how life is. Most people earn their money at a steady pace but are faced with outlays that are varied or even unpredictable – car repairs, buying a new home or new furniture, college tuition, illness, etc. Governments, like people, have the same financial woes in the terms of sometimes having to spend more than they take in. The key word in that last sentence is “sometimes.” Obviously, we can’t spend more than we take in all of the time, right? That would be crazy, wouldn’t it? I think the nice lady at the bank card company would catch on after a while.

But this is exactly what our country is doing. With the exception of a small few, the USA is spending more money that it takes in practically EVERY year. We are making the minimum payment (the interest) and then piling on more, year after year after year. By the way, this “piling on” is the called the national debt. Now just so people won’t get confused – and believe me, some people want you to be confused – let’s explain a few basic things. Each year, the government receives a certain amount of revenue from taxes and other sources. And every year, the government spends money on programs and services for its citizens, like a good little government should. Now whenever the government spends more money that it receives in a given year, it is called a budget “deficit.” Likewise, if for some reason we don’t spend all of it in that year, then it is called a budget “surplus”. The terms deficit and surplus only apply to a single year. The balance of all past years is called the national debt. So, back to my credit card analogy - if I charged $100 on the card this month, and only made a $75 payment, then I ran a monthly deficit of $25 (plus interest). My credit card balance grew larger, which is also called my credit card debt.

Anytime I hear people talking about reducing the deficit, I laugh. It’s like saying we're still falling off of this cliff, but the good news is that we are falling slower. That’s the logic that my wife uses when she buys a new dress, albeit “on sale.” - “I ‘saved’ you $200!”

Come to find out, there’s a document available from the White House and the Budget Office (and probably about a dozen other government sites) that has some cold hard facts about our nation’s financial position. I downloaded a copy of the “Budget of the US Government” for fiscal year 2011, which contains a supplement entitled “Historical Tables.” In it, you can find the annual revenues and expenses for our nation, dating back to 1789. Section 7 contains an alarming table, which lists the national debt balances for each year. It is alarming in the sense that somewhere in the list you would expect to see the balance declining, but those instances are very rare. In fact, looking back 70 years, there have only been 6 years when the federal debt has gone down since 1940. The last time that happened was in 1969. In 1969, we actually lowered the national debt by $2.9 billion. But to keep this in perspective, in the year before, we had added $28 billion and another $12 billion the year before that. All said, in the two years before and the two years after 1969, we added a total of $82 billion – so it was hardly a significant offset.

You would have to go back to 1947 and 1948 to see what I’d consider meaningful reductions. Looking at this table, $436 billion in 1972 looks good compared to the current $12.4 trillion or estimated $13.8 trillion by the end of this year (2010).

Can one even fathom how much money $13.8 trillion is? It is about $126,000 per taxpaying citizen. Please add that amount to line 75 of Form 1040 the next time you file your taxes. $13.8 trillion is enough money to carpet the entire state of New York with $1 bills. If you were to stack them up (flat on top of each other, not end to end or side to side), they would be 935,644 miles high - almost enough to reach the moon and back, TWICE! If you were standing beside this stack of $1 bills and were to shine a flashlight on it, it would take the light over 5 seconds to reach the top. Even if we used $100 bills, the stack would still be taller than the Earth itself.

Okay, Okay. I know what you are saying. It’s a lot of cash, but we are a big country. Are we really that big? Let’s see, our Gross Domestic Product (GDP) last year was $14.3 trillion. At the end of 2009, our debt was 83.4% of our annual GDP. This year it will be 94% of GDP, and almost 100% by 2011.

Still not concerned? Our government basically uses “cash” accounting. Our deficit, and therefore debt, is calculated on an actual basis, in other words, actual expenses paid out less actual revenues collected. It doesn’t consider our future obligations or revenues. It’s the same way that you use to balance your checkbook. So, if you were to look at your checking account balance of, say $40,000, you might think that you’re doing pretty well. But, if you factor in that you have to pay your twin daughters’ college tuitions next month, things aren’t so hunky-dory. The U.S. has future obligations in terms of benefits for programs such as social security and Medicare. Until now, these programs have been taking in more money than their expenditures. Of course, all of the surpluses from past years (about $2.5 trillion in total) was immediately borrowed by the federal government and is included in the national debt figures above. This year, both Social Security and Medicare will have to pay out more than they take in, which means those programs will be calling in their markers. Most of these programs are going to burn through that $2.5 trillion nest-egg (which we scrambled and ate long ago) very quickly. First, we are going to have to borrow another $2.5 trillion from somebody else just to repay these programs. But after that, these programs will be completely broke (just like the rest of us) and the federal government will be expected to pick up the slack, so to speak. We refer to these as “unfunded liabilities” and their outlook is really scary to the tune of $100 trillion.

Why am I saying all of this? It’s simple. This country needs to hit the reset button. We cannot continue on this reckless course. We have got to get on some sort of “payment plan” that gets us out from under this huge debt. Changes, unpopular changes, will have to be made to Social Security and to Medicare. Congress will have to pass (and abide by) a “surplus budget act”, where we can begin to pay down this albatross that we have securely shackled around our children’s necks.

Sources
http://www.whitehouse.gov/omb/budget/fy2011/assets/hist.pdf