Debt, Deficit, & Spending

Debt, Deficit, &
Government Spending

On the page below, you will find a few charts and additional details on why our debt, deficits, and spending should matter to you and those you love. But let me give you a little overview in reinforcing why this issue that's gotten so little attention should matter so much to our lives.

History says that debt and spending should matter because its pages show how consistently civilizations have extinguished themselves financially. There is no country in the history of man that has been able to outrun financial reality. It can certainly be done for a season, but over time math matters for the budgets of individuals, businesses, and even civilizations.

Social equity says that the debt and spending issues is the issue of our day, given the intergenerational wealth transfer that's taking place as our national debt mounts. Our country was founded on the notion of no taxation without representation, but given that deficits are nothing more than deferred taxes, young people today should be outraged at deficits accumulating at more than a trillion dollars a year. In this same vein, I find it amazing that we will spend more on interest next year than on all federal programs for children. These numbers will prove disastrous for young Americans.

Our nation's defense says debt and spending issues should matter because we will spend more on interest in 3 years than we do on the entirety of our national defense budget. Paul Kennedy wrote a great book years ago entitled ‘The Rise and Fall of Great Powers’ and showed how inextricably military supremacy was tied to economic supremacy.

The needs addressed by other government programs also highlight how this issue should matter. Interest costs compete with every other investment that our federal government might make, in improving lives and making our nation more competitive. In just 5 years, interest will be a greater expense than the entirety of what Congress debates every year on spending.

Your retirement account or savings account say it should matter because the build up of debt inflates prices – and that which goes up can come down. There are a host of indicators that show that we are now living in an asset bubble based on the buildup of debt. When that bubble pops, so to will the worth of our savings accounts, our retirement accounts.

Your job says that the debt and spending issue should matter because 2/3rds of our economy is driven by consumer spending. If the asset bubble pops, not only do our savings accounts go down, but so too do our job prospects, given the way that jobs have been tied to wealth and asset creation in our country.

I could go down a list of other reasons that this issue should be the issue of our times, but for now, let me take this as a starting point and ask that you dig into the details below.

U.S. Debt has Never Been Higher in Peacetime

Laurence Kotlikoff 210T / 60T / 40S

While many people believe that our current debt levels are well below the post WWII highs, in fact if you compare apples to apples we are frighteningly close to where we were at the time that we were fighting for our survival against the Germans and the Japanese. We didn’t have the same level of social-safety net commitments then that we do today. If you include these societal promises to the needy, the retired, and those in time to be retired [the light blue in the graph above] we are remarkably close to those post World War II debt highs. We in fact now have the highest level of debt that we have ever had in peacetime, and people like Laurence Kotlikoff at the University of Boston believe that the total of today's existing political promises to be about 200 trillion dollars.

America's debt is now compounding exponentially

Individual income tax 2017/2025 = 1.2

Sequester 150B/2020 = 2.1

The exponential growth of debt is vivid in this chart. It took us about 200 years to accumulate $5 trillion in national debt. It doubled under President George W. Bush as it went from $5 to $10 trillion. It doubled again under President Obama from $10 to $20 trillion. I believe it's well on its way to doubling once again under the eight years that would mark a two term Trump presidency. The Congressional Budget Office assumes a lower rate of growth in debt, to about 36 trillion, but their assumptions are optimistic given their generous forecasts on economic growth and future interest rates. Even if one accepted their projections, what the Congressional Budget Office has to assume in forming their budget is wildly optimistic based on the imagined politics that are built into existing law.

For instance, existing law assumes that the individual income tax rate cuts passed in 2017 will just disappear in 2025 because that’s what’s in current law. It's in no way politically realistic to think that the corporate tax change, which was permanent, will stay in place while individuals see their tax rates go markedly up. Similarly, it assumes that all the new spending that Republicans and Democrats just added last year to the budget will disappear next year. It was current law that the sequester would snap back into place next year, but it is in no way a realistic look at what will happen politically based on Republican and Democratic distaste for the sequester and what just passed with the debt deal just passed in August 2019.

Added Liabilities - Budget Deficits Highest Ever in Peace Time

Projected $1.2T average deficits over the next 10 years.

Well above historic average of 2.9% GDP at 4.4%

We now face the largest deficits our country has ever faced in peacetime. We’ve never even been remotely close to the string of $1 trillion plus deficits we are projected to see over the next 10 years. The numbers will prove much worse because deficits are projected to rise from a little over $1 trillion dollars today to over $2.3 trillion over the next 10 years. The Committee for a Responsible Federal Budget believes we could be looking at deficits above $2 trillion a year over essentially the entire time period if interest rates go up, trade tensions escalate, or the economy soften. Groups like this also point out how unrealistic many of the projections are in the budget, and yet these forecasts lead to the Congressional Budget Office’s more modest and unrealistic deficit projections.

Foreign Ownership of Our Debt

Chinese, $1.3T, 20%

Suez 1956

The  Chinese now own $1.3 trillion, almost a quarter of our national debt held by foreigners. This is up markedly over the last 20 years as foreign governments have substantially increased their ownership of American debt. This is yet another limitation on our ability to react to a financial storm. The Congressional Budget Office has also said this degree of foreign ownership could work against our ability to project force around the world and our ability to ensure our security at home. America has gone from being the largest creditor nation in the world at the time of WWII, to now being the largest debtor nation in the world.

Highest Household Net Worth in last 70 Years

U.S. household Net Worth has averaged 384% of GDP since 1952, and has peaked above 400% only twice before in the last 70 years. It now stands at 535%.

This should scream to every one of us how dangerous our debt, deficit, and spending issue is – and how it represents a clear and present danger to our way of life and the American dream. These numbers mirror a whole host of similar indicators across a broad range of assets that show we’re living in extraordinary financial times that will not last. When things return to historic norms, there will be significant contraction in the economy.

This chart shows household worth relative to GDP – which again, is the whole of our economy. It shows how inflated things have become as a consequence of the significant injections of debt into the financial system. Over the last 70 years there have been 3 asset bubbles that have taken the household net worth number above 400% of GDP. This occurred first in 2001 with the dot-com bubble when, for the first time, this indicator moved above 400% to 450%. It spiked again at the time of the real estate bubble at 486%. And has now spiked at 535%. We’ve never seen a number this high before, and as mentioned earlier this mirrors a variety of other indicators that show that we are living in mightily inflated times. These prices have been driven by federal policy.