“Gold is the money of kings…but debt is the money of slaves.” U.S. National Debt Tops $20 Trillion.

 

“Gold is the money of kings, silver is the money of gentlemen, barter is the money of peasants – but debt is the money of slaves.”

– Norm Franz, Money & Wealth in the New Millennium

“The consequences arising from the continual accumulation of public debts in other countries ought to admonish us to be careful to prevent their growth in our own.”

– John Adams, First Annual Address to Congress

 Executive Summary

• U.S. national debt tops $20 trillion for first time after debt ceiling is suspended again.
• Interest on the national debt is half a trillion dollars even with historically low interest rates.
• The national debt is a burden on ourselves, children and grandchildren essentially enslaving future generations as we put them on the hook for our profligacy.
• The national debt also acts like an anchor dragging on economic growth.
• Potential solutions (good and bad) include reduced spending, higher taxes, money printing or outright default.

The National Debt

Recently, the U.S. national debt topped $20 trillion for the first time after a deal was reached to suspend the debt ceiling…again. That represents more than a doubling of the national debt over the last ten years. At that pace, the national debt would be over $40 trillion by 2027. The debt has grown about 3-4x faster than the economy has grown over the last ten years.

A quick google search reveals that the debt ceiling has been raised 74 times since 1962 and has never been lowered. It begs the question, “What’s the point? Why have a debt ceiling at all?” The debt ceiling appears to be more of a debt target.

Now there is talk of removing the debt ceiling altogether. Quite honestly, it’s a rational suggestion given the debt ceiling doesn’t mean anything anyway. The concern, however, is if we can rack up this much debt with a debt ceiling, what happens when we remove it? At least with even the symbolic debt ceiling, it forces the issue to the surface occasionally accompanied by conversation and some political embarrassment.

Interest on the Debt

Debt must be serviced by paying the interest. In FY2016, U.S. interest expense on the national debt was over $430 billion. Without even paying a dime of principal the U.S. Treasury pays almost half a trillion dollars in interest annually. Consider this is at a time when interest rates are near historic lows!

Current interest expense represents about 2.2% of the total debt. However, as recently as 1990, interest expense was about 8%. Imagine 8% interest on $20 trillion of debt? That’s $1.6 trillion just in interest payments alone. Even at 5%, interest payments would amount to $1 trillion. Of course, by the time interest rates rise to those levels the national debt could be $30 trillion so we’d be looking at $1.5 trillion of interest expense assuming 5% and $2.4 trillion of interest expense assuming 8%.

We would never be able to afford that as a nation. And that’s just the federal government’s share of debt. The total debt (government, household, business) in the U.S. is over $66 trillion. So it’s not just the interest on the national debt but interest on all the debt that must be paid. This implies that an ever-greater share of our national output will be allocated purely for paying interest on our debts.

Compare 1980 to today’s debt load. The U.S. has embarked on a tremendous debt binge over the last 35 years.

In 1980, total debt to GDP was about 150%. Currently, this ratio stands at about 350% of GDP down slightly from a record of about 380% in the midst of the Great Recession. There is only so much debt that can be sustained by an economy. The limit is likely fluid based on a variety of factors, but it’s quite possible we’ve hit that peak and are now in a prolonged, deleveraging cycle, which will continue to drag on economic growth as it has done throughout this entire recovery.

Morality of the Debt

If debt is the money of slaves then we have enslaved ourselves, our children and our grandchildren.

Our founding fathers understood this very well, which is why it was so important to them that the federal government not run huge, perpetual deficits. The idea was that debt may be incurred in times of emergency (i.e. war) but would then be promptly paid off. The idea was not for a permanent, ever-growing public debt.

The U.S. population is approximately 320 million so each man, woman and child has about a $62,500 share of the national debt PLUS their own personal debt, which averages $40,000 per person. Additionally, total state and local debt is over $3 trillion, or another $9,500 per person. So total debt per person is about $112,000! This excludes debt owed by businesses.

Therefore, U.S. citizens are born on the hook for at least $72,000 of government debt (federal + municipal) of which they had absolutely no say!

Looking at it another way, 50% of the population doesn’t pay taxes. So if you’re a taxpayer you’re on the hook for $144,000 of debt plus whatever personal debt you owe. The average household has 2.5 people so the average total taxpaying household liability is 2.5 x $144,000 ($360,000) + any personal debt.

If inflation (i.e. money-printing) is the preferred method of servicing the debt as opposed to direct taxation, then every American suffers from that stealth tax whether they pay income taxes or not with lower income folks feeling a greater burden.

Potential Solutions

Reduce Spending

• Simple in theory. Politicians will never voluntarily do it. But, eventually, the market can force a country to reduce spending by requiring higher rates of interest on lent monies.

Increase Revenue

• Raise taxes and / or broaden the tax base so more Americans are subject to taxation.

Outright Default

• Self-explanatory. Stop paying creditors and default.

Print Money

• Printing money is extremely appealing to politicians because it doesn’t incur the direct, easily-traceable pain associated with spending cuts or tax increases.
• Printing money inflates the money supply and leads to higher prices than otherwise would exist absent the money printing.
• Inflation is basically a stealth tax because it’s hidden in daily purchases and it creeps up gradually. Contrast with higher taxes that are very apparent to anyone paying them. Inflation reduces the purchasing power of your money and reduces the value of your savings. Whereas our current tax structure is progressive, inflation is regressive hurting the very people politicians claim to want to help the most.
• Inflation benefits debtors while hurting creditors because debts are repaid to lenders in currency that has less purchasing power. Inflation is essentially an indirect default. Imagine if a household could print their own money to pay off their debts.
• Printing money is also inequitable because newly-printed money is not disbursed equally across all citizens. There are first recipients and latter recipients of the newly-printed money as it flows through the economy. First recipients of the newly-printed money get to spend the money before prices adjust accordingly (larger quantity of money in circulation drives prices up), but the folks later down the line are hurt as prices are rising before the money flows through to them. Latter recipients also receive a much smaller portion of the newly-printed money than the first recipients.

Printing money, combined with higher taxes, are the most common “solutions” employed by irresponsible, reckless, profligate governments. This massive debt load we’ve taken on will cause our politicians to eventually increase revenues through greater taxation as well as more money printing because politicians prefer those two solutions over spending cuts and outright default.

What Does it Mean For You?

The solution is to make sure you have a diverse mix of assets. In addition to traditional bond and stock assets, ensure you have enough cash reserves to cover a few years’ worth of expenses to insulate yourself from short-term volatility of the markets. Additionally, maintain some inflation-protection in the form of real estate and precious metals. Think of it like a barbell approach where your traditional assets are complimented with cash at one extreme and precious metals and real estate at the other extreme. The exact mix of all these assets, of course, is dependent on factors unique to you and your family.

The mix you employ across your financial resources is likely the most important investment decision you can make so it is critical you consult an expert who understands the issues to help shape this decision.