Tag Archives: federal debt

Remember the Federal Debt? It’s Still There

The following article was written by Simon Black of “Sovereign Man”.  During this election season that just ended, it seems especially appropriate.  Reprinted with permission.

The entire world seems fixated on this belief that it actually matters who becomes the President of the United States anymore… or that one of these two guys is going to ‘fix’ things.

Fact is, it doesn’t matter. Not one bit. And I’ll show you mathematically:

1) When the US federal government spends money, expenses are officially categorized in three different ways.

Discretionary spending includes nearly everything we think of related to government– the US military, Air Force One, the Department of Homeland Security, TSA agents who sexually assault passengers, etc.

Mandatory spending includes entitlements like Medicare, Social Security, VA benefits, etc. which are REQUIRED by law to be paid.

The final category is interest on the debt. It is non-negotiable.

Mandatory spending and debt interest go out the door automatically. It’s like having your mortgage payment auto-drafted from your bank account– Congress doesn’t even see the money, it’s automatically deducted.

2) With the rise of baby boomer entitlements and steady increase in overall debt levels, mandatory spending and interest payments have exploded in recent years. In fact, the Congressional Budget Office predicted in 2010
that the US government’s TOTAL revenue would be exceeded by mandatory spending and interest expense within 15-years.

That’s a scary thought. Except it happened the very next year.

3) In Fiscal Year 2011, the federal government collected $2.303 trillion in tax revenue. Interest on the debt that year totaled $454.4 billion, and mandatory spending totaled $2,025 billion. In sum, mandatory spending plus debt interest totaled $2.479 trillion… exceeding total revenue by $176.4 billion.

For Fiscal Year 2012 which just ended 37 days ago, that shortfall increased 43% to $251.8 billion.

In other words, they could cut the entirety of the Federal Government’s discretionary budget– no more military, SEC, FBI, EPA, TSA, DHS, IRS, etc.– and they would still be in the hole by a quarter of a trillion dollars.

4) Raising taxes won’t help. Since the end of World War II, tax receipts in the US have averaged 17.7% of GDP in a very tight range. The low has been 14.4% of GDP, and the high has been 20.6% of GDP.

During that period, however, tax rates have been all over the board. Individual rates have ranged from 10% to 91%. Corporate rates from 15% to 53%. Gift taxes, estate taxes, etc. have all varied. And yet, total tax revenue has stayed nearly constant at 17.7% of GDP.

It doesn’t matter how much they increase tax rates– they won’t collect any more money.

5) GDP growth prospects are tepid at best. Facing so many headwinds like quickening inflation, an enormous debt load, and debilitating regulatory burdens, the US economy is barely keeping pace with population growth.

6) The only thing registering any meaningful growth in the US is the national debt. It took over 200 years for the US government to accumulate its first trillion dollars in debt. It took just 286 days to accumulate the most recent trillion (from $15 trillion to $16 trillion).

Last month alone, the first full month of Fiscal Year 2013, the US government accumulated nearly $200 billion in new debt– 20% of the way to a fresh trillion in just 31 days.

7) Not to mention, the numbers will only continue to get worse. 10,000 people each day begin receiving mandatory entitlements. Fewer people remain behind to pay into the system. The debt keeps rising, and interest payments
will continue rising.

8) Curiously, a series of polls taken by ABC News/Washington Post and NBC
News/Wall Street Journal show that while 80% of Americans are concerned about the debt, roughly the same amount (78%) oppose cutbacks to mandatory entitlements like Medicare.

9) Bottom line, the US government is legally bound to spend more money on mandatory entitlements and interest than it can raise in tax revenue. It won’t make a difference how high they raise taxes, or even if they cut everything else that remains in government as we know it.

This is not a political problem, it’s a mathematical one. Facts are facts, no matter how uncomfortable they may be.

The Worst Kind of Rescuer — Note investor

Since the beginning of the financial crisis, politicians and bureaucrats trying to rescue it have consistently done nothing but fall over their own feet.  We would be hard pressed to point to a single true success story among the multitude of programs and regulations that have been proffered during the last five years.  All the while, the national debt has increased by trillions of dollars and the housing market remains comatose.

Having now seen transcripts from Federal Reserve monetary policy meetings of 2006, it is abundantly clear that the Fed had no clue about the coming housing market meltdown and ensuing crisis.  The warning signs were there, but either incompetence or arrogance prevented the leadership from recognizing the obvious.  Ben Bernanke described the cooling housing boom as healthy and said “so far we are seeing, at worst, an orderly decline in the housing market”.  Tim Geithner complained that Alan Greenspan had not received the credit that he deserved, a view that is shared among very few people these days.

Today, the continuation of previous policies and the introduction of new ones have run up the federal debt to an amount equal to the country’s entire gross domestic product.  If we add in future obligations related to an aging population, throwing more money to Fannie and Freddie, pensions, etc., the total rises to levels that are difficult to imagine and nearly impossible to pay back.  Taxpayers are in no condition to help with revenues, given that unemployment remains high and household debt is increasing (up 9.9% in November for installment debt, the fastest rise since November 2001).  As the financial industry gets even more opaque and complex, we’re more likely to see additional problems than solutions from that sector.

Where does the country go from here to address its overwhelming debt?  Really, there are four ways to get the country out of its current debt predicament.  The first two – growth and default – are highly unlikely.  As consumers and state/local governments pare down their debt, there will be little overall growth though select sectors will prosper.  As deep as the country’s debt problems have been and continue to be, a default by the federal government has a very low probability of happening.  If it did occur, borrowing costs would go up and there are additional ramifications too scary to consider.

The other two avenues are austerity (spending less money) or inflating our way out of the problem.  Austerity would be the better way to go, but causes pain and unrest during the short term.  Since most of the population has no grasp of the enormity of the country’s financial situation, politicians have talked a lot about lowering expenses but taken few actions to tackle the problem.  While some cost savings have been put in place, they will have minimal real impact.  That is why the administration has requested (and will get) the debt ceiling raised by another $1.2 trillion during the coming weeks.

That leaves inflation as the most likely course of action.  Holders of U.S. debt and any other dollar-denominated financial instrument (including stocks, bonds, real estate, etc.) will get burned as the dollar loses value, but the government will care little as they will see no other politically viable course of action.  When this all hits the fan, holders of precious metals like gold and silver, as well as those owning more stable currencies, will be rewarded.

Alan Noblitt is the owner of Seascape Capital and a note investor.  As a note investor for all 50 states and on most property types, he can help mortgage note holders in nearly any any situation.