As government debt levels soar, is America on the road to ruin?
The Obama administration's 2011 budget will generate nearly $10 trillion in cumulative budget deficits over the next 10 years – $1.2 trillion more than the administration predicted and enough to bring the federal debt to 90% of U.S. gross domestic product (GDP) by 2020, the Congressional Budget Office reported two weeks ago.
U.S. public debt was $6.3 trillion, or $56,000 per household, when President Barack Obama took office in the middle of the worst financial crisis since the Great Depression. It's now at $8.2 trillion ($72,000 per household) and if the present course continues, federal debt will hit $20.3 trillion (in excess of $170,000 per household) in 2020, the CBO predicts.
U.S. debt hasn't been that high since the end of World War II, when the debt-to-GDP ratio hit 109%. Greece – the focus of global default fears – currently has debt that's at 115% of GDP.
Money Morning Question of the Week: Are you worried about U.S. debt levels? Are we headed down the road to ruin? Why or why not? Would you favor tax increases and/or budget cuts if it meant the country would get this debt under control?
What follows are some of the most-well-thought-out and articulate answers to this question that we've received to date.
A Day of Reckoning?
"We can't afford that."
When I was growing up, I heard that phrase a lot. Once, when I was probably about six, I told my mother, "If you don't have the money, just write a check!" I had observed that when she did not have enough cash for a purchase that she would say, "I have to write a check for that," so it seemed to me like a brilliant solution. To which she patiently explained that, for a check to work, the money has to be in the bank to cover it.
Somewhere since World War II, we the American people, along with our elected representatives, have lost that insight. In our guts, we believe that the government can afford everything, even if rationally we understand that it cannot. At one time we were wealthy, (the richest country on earth!) and we learned the habits of the wealthy, but that time is past, and if we do not change our habits, they will destroy us, both as a nation and individually. And when that collapse comes, those who survive will learn again the habits of frugality, hard work, saving, investing, postponing gratification, and the difference between necessities and luxuries.
I say "when" because I do not believe that we will willingly pay the price that is necessary to avoid this day of reckoning. This price would include:
- Slashing subsidies [farmers, Wall Street, Detroit, minimum wage, educational grants, medical insurance, and hundreds of others].
- Slashing entitlements [including Social Security, Medicare, Medicaid, food stamps, ethanol subsidies, and hundreds more].
- Slashing our military expenditures [do we really need to have our military forces stationed in over a hundred countries around the world?].
- Eliminating the vast majority of the regulatory framework that constrains our every action and drives up the cost of most activities.
- And establishing a simple and equitable tax system that will pay as we go for those functions that really are essential to our government, while paying down the massive debts that we have accumulated.
Implementing these changes would cause massive economic dislocations, and would be very painful. But if we keep postponing such adjustments, then at some point the system will collapse, and I would not be surprised to see it result in the death of half or more of the American populace. This may seem overly apocalyptic, but if the gasoline and diesel are not there to keep the trucks running that supply groceries and other "essentials" of our society, how long could we keep going? With all of our "just-in-time" inventory management, there is no surplus or redundancy in the system to fall back on.
It is attractive to believe that we can avoid such calamities by simply tweaking the system, a little more here, a little less there, tax the rich more, provide a little more subsidy to those who really need it, and we can make everything work out. This is a "wealthy" attitude, and we are not wealthy any more. We are living on borrowed money and acting like we are wealthy, but debt is NOT wealth, and the reality of this is going to hit us at some point. I would like to believe that we can postpone this day of reckoning for a long time, but in my gut I suspect that we are looking at years, not decades, and the collapse could come any day. And although we can all see the warning signs, I suspect that most of us [myself included] will be taken by surprise when it actually happens. Collapses are not gradual, but happen with shocking suddenness, and if you are not already prepared, it is too late to start.
Addicted to Debt
I am very worried about the debt level in this country. As a college student, I am able to see how little my own peers actually pay attention to what's going on in the world around them. They wear Obama t-shirts like he is God's gift to this country, but they don't see what he and the rest of Washington are doing. We are becoming a socialist union (U.S.S.A. – United Socialist States of America). At the surface, it seems as though the suits are out to do good. But below the surface, I fear, the government wigs are once again lining their own proverbial pockets in the form of benefits, retirement packages, and 'bonuses.' I don't think they really care enough to care. I think they are looking out for their own best interests: "What will get me re-elected?"
I think every one of those people in Congress need to retake a basic math course, although it doesn't take a mathematician to figure out that we are headed for hyperinflation. (News Flash!) When you increase the amount of currency in the market, the value of the currency falls. Ever since we went off the gold standard in 1973 our dollar has been at risk. For three decades we have ridden the wave of "financial freedom." Now, we are going to pay the piper. We have increased the amount of currency from $940 billion to over $2 trillion just in the last few years. Remember: more money, less value. Then, to make things worse, we monetized the debt! Now everybody and their brother are lining up to buy a chunk of the American dream. The problem? They are exporting those chunks of 'patriotic' meat, thereby decreasing the overall value of our country. We're being sold at piece-rate! And when China or Saudi Arabia decides one day to call in that debt, we will find ourselves plunged back into the dark days of 1929, when banks in our own country did the same thing. If that was the 'Great Depression', this will be the 'Monolithic Depression'. (I wonder how many zeros we can fit on the dollar bill. Think Zimbabwe).
I am completely against a tax hike and here's why. The more money they bring in, the more they spend! The government is like the spend-happy wife of the poor frugal man. Giving the government more money is tantamount to giving another drink to an alcoholic or another line to a dope fiend. They can't stop spending! And they won't stop spending, as long we vote them into office. Don't get me wrong, I'm all for cutting the debt, but so long as we have Congressman in there that don't care about the debt, it will never go away. We should be ashamed of ourselves as voters for allowing this to happen. We are like the abused dog that gets the boot and then comes whining back, hoping for some love but then gets the boot again. In the same way, we hear promises from the bigwigs that they will do this and that and this if we just get them into office, but then once they are in, they kick us in the side, they forget all about their promises and they go about their business. Then when it's time to re-elect they call us in with their little doggy whistles and we come running like good little puppies so we can shake hands with the elite, get our pictures taken, and vote for the next guy who wants to spend as much money as he can in as little time as possible. It never ceases to amaze me how our own government can throw its citizens into prison for failing to pay their debt while at the same time the government doesn't pay its own. No more money until they've completed a program for over-spenders – Over-spenders Anonymous (these actually exist). I feel like a husband pleading with his wife to stop spending money!
About budget cuts, if we cut anything, it should be tax breaks, aid, and Social Security for illegal immigrants. They are here illegally! I just can't seem to wrap my head around the logic behind this one.
"Hey Obama! Let's give free money, free medical and dental, free housing, free food and free education to everybody who violates the law by sneaking into our country."
"Wow Joe! What a great idea!! But why stop there? Let's give them amnesty!"
"Amnesty, Mr. President?"
"Sure Joe. Why not? There are already 12 million illegals in this country. We may as well throw up our hands and surrender. Hell! Give'em what they want. They deserve it!"
This is sickening. Besides, it only goes back to the issue of spending. Budget cuts only mean more money for them to spend on other stuff. They will never concentrate on the debt so long as we allow it to happen.
Old Problems Fall on New Administration
It is interesting that while Ronnie [Reagan] was increasing the federal debt by $5 trillion, and G[eorge] W. Bush by another $5.5 trillionby spending money on tax cuts, illegal wars, giveaways to the military-industrialcomplexes, and Medicare Part D, most of you folks said nary a word about deficits and debtbut applauded!
When Obama took office the U.S. had a debt of $11.5 trillion, not $6.5 trillion as you stated. The only president who even got close toa surplus was Bill Clinton and he only did it by throwing in the money taken from the Social Security "trust" fund into his accounting. Obama has inherited two unfunded wars, a recession brought on by [Alan] Greenspan and his ilk, and a busted budget from two Republican presidents. As he walked into the Oval Office, he faced a trillion-dollar deficit – thanks to G.W. Bush and lots of unsolved problems for the nation to confront. He is at least trying to tackle some very tough, longstanding problems, although I think he is too indulgent of Republicans and Blue Dog Democrats and made too many poor appointments from the Clinton and Bush administration ([Larry] Summers, [Tim] Geithner, [Rahm] Emanuel, [Ben] Bernanke) to be able to really change the flawed policies of the Clinton and Bush administrations. Wall Street got away with murder and Main Street victims got left to fend for themselves. He has been in office 14 months and is being blamed for everything that has been wrong for much longer.
Do you really want to go back to the stupid policies of G.W. Bush and the Republican party? – the people who do not understand simple arithmetic that revenue matters and you can't keep giving useless tax cuts to millionaires, keepspending billions onwars and the war machine without figuring out where the money for the federal government is coming from.
Show Us the Jobs!
I read every day about how the horrible deficit spending of the Obama administration is sinking the nation, but never a word is written about the biggest spending bill in history: the Cheney/Bush tax cuts for the richest people in the country. They put a $1.8 billion hit on the national debt to buy campaign contributions for the 2008 campaign. The result: 0% job growth from 2001-2008, which made the deficit explode to record levels.
We need a return to the more traditional tax rates that helped the economy grow during the 1990's. When we get growth in employment, the deficit will go away.
Don't Blame Health Care for Debt
MM: We were surprised and pleased with the number of responses we received to our previous Question of the Week about the new healthcare law. Here's a thoughtful answer that addresses both the law and our nation's debt issues.
I think it is about time that this country addresses the on-going travesty of private insurance costs. We need the government to step in and assure that folks who become ill do not lose their coverage because private industry sure isn't going to do that. We need the government to step in and ensure that when a person loses their job and their health, they don't also lose their house – because our banks, investment houses, and the folks pushing those bad investments onto unwary investors sure aren't going to share the huge profits they made destroying the economy.
Personally, I would prefer that all the large corporations that got bailed out with taxpayer monies pay back those bailouts with interest, hand their huge bonuses over to Uncle Sam, and make amends for wrecking the economy by contributing to the costs of universal health care.
Our huge national debt isn't just coming from health care costs attendant to this bill- it's coming from those Bush era tax cuts, excessive profit-taking by unscrupulous investment houses and two wars.
[Editor's Note: Next Week's MM Question of the Week: The U.S. stock market has staged one of its most powerful rallies in history, zooming nearly 70% in the 12 months that followed the March 9, 2009 market low. U.S. stocks soared another 5% during the first three months of 2010 – its best first quarter in a dozen years. But where do we go from here?
That brings us to next week's question: Is this a true bull market? A year from now, are U.S. stocks – as measured by the Standard & Poor's 500 Index – trading higher, lower, or at the same level as they are today?
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Thanks to everyone who took the time to participate – via e-mail or by posting their comments directly on the Money Morning Web site.]
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Question of the Week: Do the Pitfalls Outweigh the Promise For the New Healthcare Reform Program?