moneyFYI
Financial Freedom Is Merely Organized Common Sense
The Debt Game Is Over. We Are Just Running Out The Clock
Who among us understands a trillion dollars? Not many I think. It is an old idea that you never really understand any amount of money greater than the largest cheque you have written on your own account. For most of us that is the cheque that bought your home. A trillion is a number beyond our ability to understand. Nonetheless in the United States, leaders have managed to accrue a federal debt of $28.8 trillion. It takes 14 digits to write.
The U.S. Federal government debt
You can see how it is changing here. U.S. Debt Clock. You might also find the graph of how the debt has changed over the years interesting. Frightening, but interesting.
I watched the clock for a while and even used a stopwatch. It takes about 34 seconds to add a million dollars. For perspective Elon Musk and Jeff Bezos are together worth about $410 Billion. That’s 410,000 millions so 410,000 x 34 seconds worth. That’s about 161 days of government borrowing. Borrowing not spending. Spending is immensely more. At the beginning of 2022, the top 25 billionaires in the country could not finance two years of increasing debt.
I am not optimistic the debt will revert to earlier levels.
September 1981was the last month-end where the debt was less than a trillion dollars. Using the rule of 72 that’s about 8.2% average annual rate of growth. About 8.7 years to double.
Nominal GDP grew 8.7x in the same period, so we have a problem.
The economy that finances the debt is up 8.7x and the debt it services is up 28.8x.
If you owe a year and a half worth of income, the debt grows at 8.2 percent per year and your income grows at 5.5%; how long until everything blows up and the bank asks you to drop by and bring powers of attorney for everything you own? It is not the same for governments, but the idea is the same. They have all sorts of tools to postpone the problem, but they cannot prevent it.
Jump out another 41 years. The government debt is $820 trillion and assuming the economy has not been crushed in the meantime, the GDP is about $210 trillion. I think the bankers will have come and gone before the end of 2063. Unless something changes.
It is all in homage to Herb Stein’s Law. “If something cannot continue forever, it will stop.” The only questions are how, when, and what should you be doing about it now?
You know the answer.
Unless politicians spend less, there is no way to prevent the catastrophe. No way. They can slow it down like Japan has done, but cannot prevent it.
Even the politicians know it, but they expect to be retired before it happens. Not that retirement will save them. Their pensions will be valueless.
Many argue they are incompetent, and others believe they are stupid. I have known several and they are neither incompetent nor stupid. The problem is the incentives are mismatched. What benefits us and what benefits them are not the same things. In their case, money to spend gives them power. In our case, their spending, financed by our taxes, unbalances our budgets. Profligate spending, like we see now, just speeds up the process.
The solution lies first with us and involves finding representatives that know how to economize. Our first step in that is for us to demand less. The second step is to stop pretending the government can solve problems. They have not demonstrated any ability in that sphere.
What should they do?
They can provide structure. The rule of law, courts, security, transportation infrastructure, and regulation of important institutions like banks and the stock markets. When they ssocietal problemse problems in society, they increase the cost and seldom solve the problem. Money wasted is money not available to solve that or other problems. The money they waste is money the people don’t have to create solutions. The people are better at it because it is their effort and money being used.
Politicians, and more commonly in recent years, the civil service need to be seen to be doing something. That they are addressing problems, not on their playing field, merely means most real problems have been solved. Perhaps not perfectly solved, but at least they have been solved enough to no longer present an impediment to society.
What happens to the people who solved them? A new problem must be found. If there are few good ones around, they invent problems or they try to perfect otherwise good solutions. Perfection is incredibly expensive and never worth the price.
If you notice, we see only absolutes when they discuss programs. Zero emissions, no child left behind, and a living age for everyone. They seem not to notice that absolutes are absolutely impossible to deliver. If they had to answer what is the cost to educate the last 100 children who don’t want to learn or can’t learn, they would be less inclined to use rhetoric instead of reason to get support. It is a certainty that the cost to get from 97% emission reduction to 100% emission reduction will be greater than the cost to get from 0% to 97%, and they know it, or knowing they would not like the answer have not checked.
If we want politicians to act in our interest, we have given them an impossible task. We should not be surprised that they use the position for personal attention instead of improving the individual citizens and society as a whole. For the past century and more, politicians have used their office for political goals. I doubt that can be reversed in 5 years, or even 50. We may have to come to grips with it as a way of life.
The best we can hope for is that the rate of change gradually returns to something we can cope with. If the government ran a surplus of $200,000,000,000 per year (two hundred billion) and used that plus a flat amount equal to the interest they will pay now at 3.5%, to get a blended payment, they would be able to pay off the debt in 100 years.
The parts to take away.
Getting out of debt requires giving up some spending you have now or increasing the wealth you have to service the debt. If governments take more of your money, the economy will slow down making it harder to address the debt. Reduced government spending and fewer regulatory intrusions in the economy might work, but a hundred years of surpluses seems a stretch.
Protect yourself as best you can. Existing politicians and the ones waiting to be politicians are not going to easily give up the ability to spend on whatever seems to gain them favour.
I build strategic, fact-based estate and income plans. The plans identify alternate ways to achieve spending and estate distribution goals. In the past, I have been a planner with a large insurance, employee benefits, and investment agency, a partner in a large international public accounting firm, CEO of a software startup, a partner in an energy management system importer, and briefly in the restaurant business. I have appeared on more than 100 television shows on financial planning. I have presented to organizations as varied as the Canadian Bar Association, The Ontario Institute of Chartered Accountants, The Ontario Ministry of Agriculture and Food, and Banks – from CIBC to the Federal Business Development Bank.
Be in touch at 705-927-4770 or by email at don.shaughnessy@gmail.com.
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