For those of you that know me, you know that the problem of our soaring national debt is probably my biggest hot button issue. As you saw from my post last month, I consider this to be the single greatest threat facing our country today outside of a terrorist getting a WMD onto our shores. The hole we have dug ourselves into is so deep that it will take a long time and tremendous sacrifices to crawl out of it. Immediate action is necessary because each day we wait, the problem compounds itself. We have already reached the point where the cost to fix this situation stands a strong chance of slowing down our already struggling recovery. However, due to the severity of the problem, the cost of inaction is far greater than the cost of action, because when the house of cards start to tumble it will fall fast and, just like Rome, our great empire could literally fall in a day (and if that unfortunate day comes hopefully you will own a fair amount of gold and a firearm). It will make our “Great Reccession” look like a walk in the park.
What I would like to do is break down the national debt for you in easy-to-understand, layman’s terms. People sometimes think this topic is too complex to get their hands around but that’s not really the case despite the size of the numbers. You do not need to be a CPA to understand this. It boils down to a simple understanding of where our country’s income comes from, where the money goes, what expenses are around the corner and just a basic understanding of arithmetic. Most people have a rudimentary grasp of this from just watching the news but since so many news outlets have a political slant these days the numbers tend to get manipulated in the form of propaganda to bolster the ideology of one political party or the other. I’m just going to give it to you straight without the spin (well, maybe just a little).
First off let me tell you how I learned a majority about this topic myself. I’m a big fan of documentaries and one day I saw one called I.O.U.S.A. that blew me away. I already had a better understanding than most about this topic but my eyes got opened to some other parts of the problem that I hadn’t previously been aware of. The gentleman that created and narrated the documentary was David M. Walker. He is the former Comptroller General of the US and served as the head of the Government Accountability Office (GAO) from 1998–2008. He was basically the nation’s top auditor and about as credible of a source as they come. He is currently the president and CEO of the Peter G. Peterson foundation. This is a non-partisan organization that has been lauded by some of the biggest liberal and conservative think tanks in the country. Its sole purpose is to raise awareness of our debt burdens and how they will affect current and future generations. In 2005 they started a Fiscal Wake-Up Tour and travelled the country educating people about our current financial crisis. If you haven’t seen I.O.U.S.A. then I highly recommend it. If you want to see the 30-minute Cliffs Notes version online you can go to www.youtube.com/watch?v=O_TjBNjc9Bo. The information is a few years old now but I promise that it will open your eyes the same way it did mine. I also waited to write this blog until I finished reading his book called Comeback America, which provided even more in-depth information together with some great suggestions of what we can do to get out of this mess. If you pick up a copy of it you won’t be disappointed.
Let’s start off with explaining what the difference is between the deficit and the national debt. This sometimes confuses people. The deficit is usually a yearly number that simply takes the amount of money that comes in to the treasury from taxes and subtracts how much goes out for our national expenditures. If more comes in than goes out we have what is known as a surplus (sadly, we haven’t seen too many years of this). Conversely, if more goes out than what comes in, that’s a deficit. This year the deficit is predicted to be anywhere from $1.5 to $1.65 trillion, the largest year on record (in dollars, not percentage of GDP).
The national debt is not a yearly figure, but a cumulative one. It is basically the total amount of money that we currently owe as a nation. Right now our national debt stands at $14.22 trillion, which is a staggering number. The amount has been in the news more than usual lately because of a political wrestling match taking place on the Hill to raise our current debt ceiling, which is currently set at $14.29 Trillion. According to the current Secretary of the Treasury, Timothy Geithner, under the existing limit we have only until August 1 before we start defaulting on our debt. The ramifications of defaulting are nothing short of disastrous. Depending on how soon after that date an agreement is reached, we could be talking about a devaluation of our credit grade, a large increase in interest rates, a couple-thousand-point or more drop of the Dow, a return to recession and, at worst, a massive selloff and total devaluation of our dollar, which would likely lead to a world-wide depression and the cataclysm I described in my opening paragraph. Credit markets are all about trust. Because people always count on our ability to repay our debts is why we can keep the interest rates really low, which in turn limits our exposure to interest on the debt as well as keeps all other rates in the country low. Once that trust gets rattled is when the dominos start to fall. I am hopeful that something gets worked out before August 1 or we are in for a world of trouble. Call or write your congressman. It’s that serious.
To give you an idea how large our existing debt is, if we wanted to pay it off we would need to collect $46,000 from every person in the country. Because not everyone pays taxes, the amount we would need to collect from every taxpayer is $128,500. That would be above and beyond a person’s normal taxes just to keep the government in operation. Obviously it’s not in the cards for this to all be paid at once.
Many people are curious where the money comes from for us to be able to spend more money than what we bring in. How can we owe over $14 trillion? Are we just writing IOUs? Well, not exactly. Our national expenses, above and beyond what we bring in from tax revenues, are paid by borrowing the money in the form of US savings bonds, treasury notes or treasury bills (T-bills for short). These are bonds where someone is basically loaning their money to our government in exchange for a return of their original investment at some point in time down the road (anywhere from one month to 30 years), and interest is paid every year along the way.
US T-Bills have long been considered one of the safest investments in the world (that is, unless we start defaulting). We have a sterling AAA credit rating from all the major rating agencies and that allows us to keep interest rates really low because the risk is low. In turn, this also keeps our other rates low, like for a mortgage or car note, which stimulates our economy. If you think it’s hard to sell your home now, imagine how much harder it would be if the rate on a 30-year fixed mortgage was 10% (or 18% like it was in the early ’80s). Despite these low rates we currently pay approximately $240 billion in interest on the debt. That’s about 20% of our national expenditures and more money than we spend on education, homeland defense, the Department of Transportation and NASA combined. Imagine what we could do if we had an extra $200 billion each year to spend and the good it could do. If left unchecked, in the next 10–12 years that interest payment would up from 20% of our expenses to around 50%. It will become our largest national expense eclipsing the costs of Medicare, Social Security and Defense combined. Talk about living hand-to-mouth. That’s when we will really be in trouble and it’s not like 10–12 years is so far away either.
Who holds that debt, you might ask? Who are these people loaning us all this money? It comes from quite a few different sources. Some of them are:
- Individuals like you and me
- Pension funds
- Insurance companies
- State and local governments
- The federal government (mostly from the Social Security Trust Fund)
- Foreign investors, banks, corporations and governments
The largest expanding area in the last 20 years is from foreign entities. China is the one that gets the most press because they have the largest share, but other countries like Japan, Russia, Venezuela, Saudi Arabia, Nigeria, Iran and many others have invested quite a bit in us as well. This wasn’t always the case. After WWII all of our debt was held domestically. About 50 years ago that started to change but it escalated quite a bit in the last 20 years. In September 2009 we passed the point where foreign nations and investors owned over 50% of our debt. By the end of 2010 the number grew to 63%. The problem with this is that it makes us reliant on these other countries and they use that strategically to their advantage. As long as they continue to invest, and invest heavily, our interest rates will remain low and that helps foster our recovery and growth. They know this. So, if there is something they want from us, all they have to do is threaten to stop
buying our bonds and our currency, or worse yet, they could start selling them. This would drive rates way up, which would be put us on the fast track to a double dip recession or worse. So these countries use that leverage to get things from us that they want.
A case in point is Fannie Mae and Freddie Mac. Fannie and Freddie are government-sponsored organizations; however, they are still privately held corporations. Our government has a certain amount of influence over them, considering how many political figures sit on their boards, but we are not required to guarantee their debts (until, of course, they went into receivership and had to be taken over). Many foreign investors didn’t fully understand the relationship and assumed that any money invested in bonds or mortgage-backed securities from them were backed by the US Government. Since their rates of return were higher than T-bills these foreign entities invested heavily in these two organizations during the boom years, and when the housing crisis began they stood to lose a tremendous amount of money. So what did they do? Two of our biggest lenders, China and Japan, put tremendous pressure on us to bail out Fannie and Freddie so they would stay solvent. And guess what? We folded like a cheap tent. So far we have bailed them out to the tune of $135 billion and estimates say that we have another $19 billion coming in the short term and, if the market starts shrinking again, that number can rise to an additional $124 billion. That’s not chump change. Since we didn’t have the money in the budget to do this, or any of the other bailouts for that matter, we had to sell more bonds and T-bills to pay for it and the vicious cycle continued. In just the last three years our debt has grown by 43%.
If everything I’ve told you up to this point hasn’t scared you, then this next bombshell I’m about to drop most likely will. Here it is: The $14+ trillion that I said was our national debt isn’t really an accurate number. It’s really only the tip of the iceberg. You see, our country has a unique accounting system that it uses that virtually no other country in the world employs. In other nations they put a liability on the books when money is supposed to be allocated for a future expense, based on a pre-set savings plan for that future cost. So, for example, if they need $20 billion in 10 years, and say they’re going to save $2 billion each year to hit that mark, they will show that $2 billion in each year’s budget and, if the money isn’t actually saved because of some emergency, that $2 billion immediately gets added to their deficit and national debt.
Conversely, the US only feels the need to list a liability on the books when the expense is actually incurred. So, in that same example, if we neglected to save the $2 billion a year, that wouldn’t show in that year’s annual deficit or our cumulative national debt totals. It would only show up in 10 years when the full $20 billion bill became due. If corporations tried to use the same accounting system they would be prosecuted and heavily fined by the FTC because it would seem like they were trying to hide expenses from their shareholders and creditors. However, the US somehow gets away with it.
So what is the real debt we currently owe? This is going to blow you away. We currently actually owe right now over $62 trillion! A number so large that if we stacked $100 bills on top of one another, the stack would actually reach from the Earth to the moon. To what do we owe that money? Here’s the list:
- The National Debt – $14.22 trillion
- Social Security – $7.7 trillion
- Medicare Parts A&B – $31 trillion
- Medicare Part D – $7.2 trillion
- Miscellaneous – $2 trillion
This is the amount of money our nation should have put aside as of today to meet future obligations, mostly on the entitlement programs. How much of that $62 trillion have we actually saved? Absolutely nothing! Other than four years in which we experienced surpluses while Clinton was in office we have had a deficit every year going back to Nixon and every year afterwards up to the current administration. To pay that back in its entirety that calculates to over $200,000 for ever single man, woman and child living in the US. That number nearly triples if it figured only on taxpayers.
How on Earth could this have happened? Who let it happen? It boils down to the actions and inactions of exactly 555 people every year. I will post an article that someone forwarded to me that explains this better in one of the comment boxes later and you’ll see what I mean. Basically, this is financial irresponsibility of the greatest possible scale. Year after year, politicians have burned the candle at both ends. They have given the public everything that they have asked for and more. They wanted tax cuts. Sure thing. They wanted increased benefits. No problem. We fought two concurrent wars, so that we could fight the terrorists over there, instead of over here, and at the same time not raise taxes to pay for it. Easy, we could do that, where’s the credit card? Anything to make sure that they got re-elected. When it came time to pay for all these things, they had a choice; tighten our belts or kick the can down the road. Which option do you think politicians most often chose? You got it – kick the can. They’re quite good at it too. Not just at the federal level but at the state and local levels as well, but that’s another story for another post, however. Munis are the next three alarm fire coming up on us quickly.
At some point this piper needs to be paid by doing the exact opposite of what has been done up to this point. We need to both cut benefits AND raise taxes. Most people are okay with the general idea of cutting benefits, but once you start polling them with what things are okay to cut, things start to get tricky. Our two biggest expenses are the mandatory entitlement programs like Medicare and Social Security. However, when you mention touching either of these, senior citizens get up in arms. Considering that older people represent the largest collective voting bloc in the country it is almost akin to political suicide to bring something like this up. So the next biggest expenditure is defense, but once you start talking about cutting from its budget, your political opponents paint you as unpatriotic and infer that doing so would put our troops in harms way. So, most people start talking about mino discretionary spending for things like NPR, the National Foundation of the Arts, Planned Parenthood, financial support to other countries and the like. However, all of these items have such relatively small budgets, that even if you cut their funding completely, it would only be a drop in the bucket for what we need to become solvent. Only shaving $100 or $150 billion off the budget, when you currently are behind $62 trillion, is the equivalent of pissing in the wind. It’s a good start but not nearly the kind of radical response that is needed at this point in time.
The other issue of raising taxes is even more of a hot button with people. No one wants to pay more taxes and if you asked most people they would say they’re already paying too much now. What’s crazy about that is that our current tax rate is at its lowest point in the last 50 years. When people say taxes are too high the question should be asked “In relation to what?” Too high compared to what you paid last year? No, it’s the same. Too high compared to what you paid 10 years ago? No, it’s lower. To 20 years ago? It’s way lower. Most people aren’t aware of this, but at one point, this country’s tax rate for the top tax bracket was 94%. For many, many years it was in the 70+% range. Now the wealthiest Americans only pay 35% and there is currently a bill that passed in the House and they are trying to pass in the Senate to lower that rate to 25%! Why??!!! The argument they make is that they’ll cut out some loopholes, which is a good idea, but why on Earth would we consider lowering the tax rate to the lowest it’s ever been since the tax code was first introduced when we’re in a financial hole so deep we might never climb out of it? If I can access all these figures to show this is untenable in just five minutes on Google, why can’t our Congressmen and women, or members of their staffs, be able to do the same thing? They don’t want to just kick the can down the road; they are suggesting a solution that would actually make the problem worse. A person hardly needs to be brilliant to figure all of this out. They just need a rudimentary understanding of basic mathematics. The craziest part of this situation is that those who are the so-called fiscal conservatives are the ones offering up the most financially irresponsible ideas. It’s like they came down with Mad Cow disease which has affected their rational and cognitive thinking. We need more tax cuts right now for wealthy people like we need a hole in the head.
Let me put this into another perspective and scale it down as if it’s the budget of a family. I’ll use the projections for this year, 2011, from revenue and expenses and just move the decimal point to get it down to an average family’s income level. I will also show it in proportion to the current government proposals so you can see just how ridiculous they are. Here goes:
- Income for the year – $44,600
- Bills for the year – $61,600
- Amount the family is in debt – $620,000 (where the majority needs to be paid back in approximately 30 years)
How is this family possibly going to make it? If this was your family budget, what would you do? If this family was a good friend of yours and came to you for advice, what would you suggest? Would you suggest that they just cut out a cup of coffee and a donut every day plus trips to the salon that would shave off about $1000–$1500 a year off their bills (because those are the equivalent numbers that members of Congress are suggesting we cut to try to balance the budget). This doesn’t seem like enough cost savings to me to get them back in the black. Not even close. Not only does it not come close to cutting their expenses below their income level, it doesn’t even touch that big nut they have to pay off that’s looming over their head like a time bomb. It will only add to that number and make it worse.
Might you suggest that they get a second job or just a better paying job that brought in more income? That makes a lot of sense. Well, what is the equivalent of raising income for our country? That’s right, it’s raising taxes. Would you ever tell a person in this situation that instead of raising income they should instead lower it (because, again, that’s what the current proposal in the House, and now the Senate is suggesting)? Take some time off and take it easy. Let your kids worry about the bills when they get older. Even though you spent all that money, why should you have to pay for it? Let them take care of it. This sounds ridiculous and just plain selfish, doesn’t it? Could you in good conscience ever recommend such a crazy idea to a friend in such bad trouble? Would you do that if it were you in this situation? Hell to the no. You would tighten up your bootstraps and get to work. You’d make sacrifices, even if they were horrible, because that’s what your family needed to do in order to survive. You could always put your head under a rock and pretend the problem wasn’t there (as our country has done for about 30 years now) but not so surprising, nothing ever seems to gets better that way. Unlike your teeth, this problem will not go away simply by ignoring it.
It’s not surprising that congressional approval dropped in the most recent Gallup poll to only 17%. It is the most ineffective branch of government by a wide margin, and party politics is the biggest part of the problem. They’ve lost site of the difference between political victories and real victories for the American people. What happened to the good old days when our representatives voted their consciences and not necessarily what their party leaders told them to vote for?
Let’s not let the voters off the hook either. In the past, we voted for the smartest people with the most level heads. We trusted them to make the best decisions for us. Now we vote for people that we think are just like us. That doesn’t work. The average IQ of the people in Congress has dropped by about 20 points over the last couple of elections because we keep looking for the person we would feel comfortable having a beer with. When did that become one of the most important criteria? Also, I can understand the desire to take out the trash and make a clean sweep if we think they’re doing a bad job, but let’s replace them with the highest common denominator, and not people that couldn’t pass a citizen test if they were given one on the spot.
There are many parts of what I covered here today that really need to have their own separate posts written about them to get into
more detail. This is the macro but it’s important to cover the micro as well. There is a lot of great material to cover on the big three expenses of Social Security, Medicare and Defense that I will go over soon. I also would like to share some suggestions on what we can do to fix these fiscal challenges instead of just complaining about them. Let’s be honest: the kind of changes that we need to right the ship will be initially be incredibly unpopular and they’re going to hurt. A lot. But they won’t hurt nearly as badly if we start addressing them now. The longer we wait, the greater the pain and the sacrifices we will need to make.
It’s about time for more people to be aware of what’s really going on behind the curtain and demand that our elected officials start actually doing something about it – not just giving us cheap rhetoric so we vote for them, because talk is cheap, but showing us action. If both parties would just stand arm-in-arm, and tell the American people that this is what’s necessary, then the people would go along with it. But when one party only wants to cut benefits, and the other only wants to raise taxes, then we’re not going to go anywhere. They have to realize that they are all in the same boat, not two different boats. It’s time to start rowing in the same direction, and not in two opposite directions, and it’s up to us to hold them accountable until they do.
As usual, I welcome all of your questions and comments. Please post replies within the blog instead of on Facebook or Twitter.