National Debt Urgency and Primacy

Origins of a Debt Economy

At the beginning of a week where Congress is destined to enact its annual tradition of raising the national debt ceiling, it is essential our nation takes notice of the importance and inevitable impact it will have on every citizen. We've already seen the economic damage resulting from excessive personal debt. The catastrophic impact of a bursting debt bubble was limited because governments around the world transferred the private debts of its citizens to its own balance sheet. Hence we arrive at a day where $12.1 trillion of debt is not enough to finance the basic functions of US government. Debt limit increases can now be considered an American "tradition" in line with annual July 4th fireworks, Thanksgiving feasts, and American Idol.

Politicians everywhere love to criticize a national debt soaring above $12 trillion but somehow forget to propose policies consistent with their criticism. No worries, as we are repeatedly treated to the reassuring words that this will be a “problem for our children and grandchildren”. For the average voter this is certainly worthy of expressing public concern but will never reach the top of their private agenda when placed in competition with their immediate personal security, economic well-being, local infrastructure, social services, or other government initiatives. Politicians, meanwhile, are able to convince themselves of their elected duty to serve the public now and keep this issue on the back burner until after their next re-election date.

Americans have prospered greater than any historical society over the last century. This multi-generational comfort has created a sense of entitlement and optimism where nobody is capable of thinking about a world that doesn't improve each and every year. For a long time, people everywhere always believed their incomes would rise, homes would appreciate, and stock portfolio would see double digit returns each and every year. Even after reality has finally approached the American household since mid 2007, the general expectation is for government to come riding to the rescue and put out this minor recessionary fire. While attitudes have shifted toward saving and fiscal responsibility at the household level, we still don't see this catching on at the government level. Raise taxes and you'll get public outcry but conduct deficit spending, which by simple math must be paid for by future tax increases and you see nothing more than a passing concern for our “children and grandchildren”.

Facts and Figures Worth Pondering

The tea party movement has been impressive because we're finally seeing an organized resistance to reckless spending policies and a perpetually growing national debt. Consider the facts:

• The National Debt in graphical terms is quite interesting to observe. Prior to 1980, the US government carried less than $1 trillion in debt. In 30 short years, we've increased this twelve times! Over the last ten years, we've more than doubled the debt! Hence we see this exponential shaped curve.

• With single year budget deficits soaring past $1 trillion and expected to climb even further, we're looking at a potential $25 trillion debt by 2020.

• The cost of servicing our debt (aka paying interest) is currently around $200 billion per year. Projections for the end of the next decade, assume a servicing cost of nearly five times that. Yes, I did just broach the trillion word. Does this sound like a problem for your children and grandchildren? Perhaps, but it looks like an even bigger headache for the current crop of taxpayers.

• These projections are only in consideration of current spending proposals and the usually generous economic forecasts. Throw additional military spending, national health care, financial bailouts, and a slower than expected economic recovery into the mix and the numbers don't look so pretty.

In light of these facts, I'd ask the following questions:

• Would you invest in a company with higher debt levels than annual revenue?

• Say your household was already deep in the hole. Would you make statements like, “We must spend our way out of financial distress”?

• If your household made an annual income of say $100,000 would you be remotely comfortable with $100,000 in credit card debt?

Examining the Source

In spite of this being a common sense issue confronted by a series of nasty facts about our not too distant future, the debt manages to continue rising. How is this occurring and who are the major culprits of this trend? Answering this question requires entering the mind of your average politician, whether at the local, state, or federal level. These people are receiving requests from their constituents on a wide assortment of topics. Saying no is easier said than done, as it is effectively their job to represent the wishes of their constituency. This is why every Congressional bill is loaded with local pork barrel projects. This is why state budgets have literally doubled over the last decade. This is why long-time entitlement programs are always adding new benefits and never subtracting the inefficient ones. In a budget reaching the trillions of dollars, politicians have no incentive to concern themselves with the minor million and billion dollar expenditures. The largest programs have no chance of losing funding because no elected official wants to stamp their name next to service cuts. Doing so would be the equivalent of funding and producing their competitor's attack ads in the next election.

This is how we arrive at trillion dollar budget deficits. According to Republicans, Medicare Part D and tax cuts were essential services for the most deserving Americans. According to Democrats, a national health care plan and environmental regulation are rights of the American people. Both parties would agree we cannot put a price on national security or energy price stability even if it means fighting two wars and intervening in governments halfway around the world. Cuts in Social Security and Medicare? Forget about it!

As we look forward, there is no stopping the gravy train of excessive government spending. The Obama administration is already projected to nearly double the national debt by the time his second term would expire. It took over 200 years to reach $11 trillion in federal debt, but his budgets and trade deficits are expected to add another $11 trillion before his legacy is sealed. While he cannot be entirely faulted for the situation his administration inherited, his first year in office did nothing but extend the fiscal irresponsibility. We've already seen a record piece of legislation intended to provide short term stimulus, continuing trillion dollar bailouts, and a health care plan expected to cover all Americans without a reasonable way to pay for any of it. If this is the path of a mere one year of work, it's scary to think of the impact of another 3-7 years.

Meanwhile, Republicans may have finally found their calling in criticizing this administration for these reckless spending policies but it's hard to take them seriously. After eight years of a Republican administration, the nation saw record spending and deficit levels without so much as a peep about the financial difficulties it might someday cause. Meanwhile, their solution to these economic woes are a series of tax cuts accompanied by no tangible reductions in spending. Considering the economy is stuck in a deflationary spiral where businesses and households are in de-leveraging, saving, and frugality mode, it is unreasonable to expect a few extra dollars to provide any sort of meaningful impact. Tax cuts would merely add more to an already unsustainable deficit. Their own record on the national debt is nothing to boast about. Simply look at the graph above and line up the years of the Reagan, HW Bush, and W Bush regimes.

What are the Implications?

Since neither party appears serious about the debt issue, it is left to the taxpayers themselves to demand change. The tea party movement is an excellent start in mobilizing public opinion and drawing attention to these issues. The debt problem will never be taken seriously, however, as long as the public is misinformed about how imminent its impact will be felt. Currently, we are able to repay debt with even cheaper Treasury financing due to the perceived safety of the US dollar. However, the world has finally begun to question whether this safety is in fact reality due to the Federal Reserve printing money, US government running trillion dollar deficits, and banks adhering to a fractional reserve lending system that makes money supply expand at exponential rates. This Ponzi scheme is due to break at some point just as the private debts of households eventually reached its breaking point. When this occurs, the demand for US debt will wane, Treasury rates will spike, and a new source of funding the deficits will take hold. Look no further than the US taxpayer.

The $12.1 trillion national debt is a widely publicized figure and the source by which the new debt ceiling will be aimed at. A quick look at usdebtclock.org considers all the other factors at work including state/local debt, Social Security/Medicare/pension liabilities, and personal consumer debt. This averages to a liability of $345,713 per US citizen. Do you think there are many citizens comfortable with this burden? Maybe Warren Buffett or Bill Gates could handle their portion but the average household with an income of $50,000 might find that difficult to swallow. When each additional expenditure is phrased in those terms, I think we'd find a public nearly 100% unwilling to finance all the “essential” projects in government. Most don't think of the debt as future tax obligations (and obligations in the very near term), but they truly should. When phrased like this, I'd expect almost every American voter to place national debt at the top of their political priorities. Thanks to a disingenuous elected representation and a naive media, these issues are never confronted and merely kicked down the road to somebody else. The day of reckoning is near, and we must begin accepting these realities today.

Where to Go From Here?

It's not too late to save our futures and make this debt bearable for current and future taxpayers to deal with. In order to claim success, we must freeze all new spending unless accompanied by an increase in taxes or cuts elsewhere. We must examine the trade deficit and begin focusing on making US labor more competitive so we can develop a more healthy export economy. We must reform every entitlement program even though it will almost certainly mean difficult cuts in retirement, medical, pension, and welfare benefits. We must elect fiscally responsible representatives with an eye toward the nation's future rather than their future re-election. We must end the partisan nonsense leading to perpetual gridlock and a lack of true accountability. We must end the bailout era and allow the economy to hit bottom even if this means significant short term pain. Most of all, however, we must educate the public so they can rightfully demand an end to the structural deficiencies in the American system so reliant on debt. This is achievable but requires the full dedication of those with the knowledge to enact this change. I deal with all these issues in much greater depth on my blog at www.muwabi.com/blog. I hope all readers will visit this website, spread the word, and do their part to fight for the American dream today, tomorrow, and forever.