Posted on Friday, 22nd January 2021 by

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The national debt consists of public and intragovernmental debt owed by Uncle Sam. Public debt is what the government owes to bond holders including American citizens, international investors, and foreign governments that buy our bonds. Actually, U.S. citizens own the majority of the national debt!

 

Currently, the national debt is just under $28 trillion dollars and is expected to reach or possibly exceed 100% of our gross domestic product (GDP) in 2022. The last time we attained this lofty perch was during WW II. Seventy percent of our GDP is generated by consumer spending!

Government Borrowing

The government borrowed 56 cents of every dollar they spent to cover this country’s 2020 budget and the 4 trillion spent on COVID relief last year. The Federal Reserve, this country’s central bank, simply made an entry on the books increasing their reserve sufficient to cover the deficit, and then purchased bonds from the Treasury to cover the shortfall. The Central Bank makes money out of thin air and then buys Treasuries that few if any others would purchase under the circumstances.




Everyone is impacted by out-of-control spending, and neither political party is immune to spending beyond our means. COVID relief was and is still necessary, however it should be targeted to those truly in need and government must tighten its belt to make up some of the shortfall.

The state of the American economy isn’t in the best of shape even though you wouldn’t know it from the stock market highs we’ve seen recently.

The only things keeping the market up, from my perspective, are the huge profits from select industries deemed essential during the pandemic, increased consumer spending due to stimulus payments, anticipation of additional stimulus spending coming down the pike, and the hope that the economy will open up quickly and prosper from pent up demand once the majority of Americans are vaccinated.

Stock Valuations

Stock valuations are at all-time highs and the tech sector growth has exploded this past 9 months. According to a recent Reuters’ article, “The technology sector along with shares of big tech-related companies — Amazon, Google-parent Alphabet and Facebook — account for about 37% of the market-cap weighted S&P 500!” It feels like the Dot-Com bubble of 2000.  When new tech stocks increase 100% the first day of trading and other tech stocks are spiraling up 400 to 500 % and higher, the trajectory seems unsustainable.

Zoom Video Communications, Inc. (ZM) was selling for $67.28 on January 2, 2020 and rose to a high of $578 last October. It now has a valuation of $113.6 billion dollars and selling at a price to earnings ratio (PE) of 273! The modern-era market average PE is 19.6. Zoom’s value is now greater than IBM, Caterpillar, or 3M! According to The Motley Fool, there is some evidence of a possible sector rotation to downtrodden value stocks.

The following chart depicts the scope of the debt problem and unfortunately the predicament we find ourselves in today.  This chart compares the United States’ budget and spending to that of an average American family. These figures do not include over 158 trillion dollars in unfunded liabilities for projected future social security, Medicare and other costs.

Government Budget Statistics for 2020

  • United States Tax Revenue: $3,863,000,000,000 (Estimated)
  • Federal Budget: $4,790,000,000,000
  • Stimulus Spending $4,000,000,000,000 (COVID Stimulus)
  • New Debt: $4,927,000,000,000 (Budget – Revenue + Stimulus)
  • National Debt: $28,260,000,000,000 (Doesn’t include unfunded liabilities)

Now, remove eight (8) zeros and imagine it’s a household budget as noted below. The title for each entry was changed to a related household category:

  • Annual family income: $38,630
  • Money the family spent: $87,900 (Budget + Stimulus)
  • New debts: $49,927 (Borrowed in the Current Year)
  • Outstanding debt: $282,600

The $282,699 could include credit cards, home mortgage, and car loans. However, the interest would be prohibitive. For example, consider the average total interest paid on the debt at 7%. Credit card and auto loan interest can be much higher than the current 3% home mortgage rate. The yearly interest would consume $19,775 or 48.5% of their annual family income. Totally unsustainable.

Printing Money – The Federal Reserve

Thankfully or regrettably depending on how you look at it, the Federal Reserve simply makes a book entry adding trillions to our money supply. They purchase Treasury notes, bills and bonds plus they now purchase bonds and equities of all stripes. This is somewhat disconcerting on many levels. The government must keep interest rates artificially low in order to service the debt and pay interest to the bond holders. Otherwise, we could default on our obligations and that would devastate the world economy.

How long could a family continue doing this without going bankrupt and insane to boot. Having unmanageable debt would drive me CRAZY. The government knows this is a problem but continues to ignore the issue. Imagine having a $100,000 loan and you decide it’s best to borrow more each year without substantial payments on the outstanding debt. This simply can’t work.

We are truly in a debt crisis and the longer our economy is shut down, the worse it will get. A balanced budget amendment would help to restore our financial health and ensure future Congressional bodies won’t break the bank. We frequently hear about ten-year budget reduction plans passed by congress. However, after the next election, the new congress is not obligated to continue with those plans and often ignores them completely.

In my opinion we don’t have a revenue problem; we have a chronic spending problem!

I wrote several articles that discuss ways to protect what you worked a lifetime to accumulate. You may find these interesting, some were written several years ago. Take that into account when reading them:

Find answers to your questions: The best time to retire, retirement income vs expenditures, FEGLI options and costs, TSP risks and withdrawal strategies, and other relevant topics. Determine what benefits to carry into retirement and their advantages. You will also have the opportunity to set up a personal one-on-one meeting with a CERTIFIED FINANCIAL PLANNER.

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Posted in BENEFITS / INSURANCE, FINANCE / TIP, RETIREMENT CONCERNS, SOCIAL SECURITY / MEDICARE, SURVIVOR INFORMATION | Comments (2)


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2 Responses to “Unreasonable Expectations – The Debt Crisis”

  1. Elliot Karp Says:
    February 4th, 2021 at 2:25 pm

    Your contention that we have a spending problem not a revenue problem flies in the face of the facts!
    The fact as you sadly pointed out, this pandemic is affecting us all and until we gain control we will be in perilous personal and financial health. Tax cuts for the wealthiest individuals and corporations neither stimulate the economy as well or quickly as monetary payments (to those most affected by the pandemic) and a stimulus package for infrastructure.

    This is a national emergency just like a war footing! We need to spend what we have to to insure we triumph over this terrible disease! Certainly we need to be concerned about the debt – but this can be tempered by an improved economy and a targeted tax on the wealthiest co’s and individuals!

    I can’t help but notice your conservative slant and I endorse that trait for investing and savings. But economists have shown that a deficit in and of itself is not “bad” if used to avoid a worse economic state! Once again, after conservatives are out of political power they cry out against a deficit they helped create and amplify by their terribly un-conservative tax cuts and increased spending! I just read an article showing that Democrats created more jobs for working class people than Republicans when in power. In contrast there was also an article on how yacht owners were able to avoid Covid dangers by having adjacent tender boats (ie smaller yachts) act as “Quarrantine” quarters for staff and visitiors!
    I’m sure such people could afford a tax increase!

  2. Dennis Damp Says:
    February 5th, 2021 at 1:18 pm

    Thanks for taking the time to comment on my article. All good points and well taken. I don’t deny we need COVID relief and mentioned that in the article. Yes, this is a national emergency and steps must be taken to get things back to normal. I agree with all of that.  

    You mentioned that. “we must spend what we have.” The problem is that we don’t have the money to spend and that has already been allocated and they plan to send more; most of it is not targeted and distributed on need. Millions of people who haven’t had their incomes disrupted and can comfortably work from home received taxpayer-funded “relief” checks. Last year our government borrowed 56 cents of every dollar they spent and your contention that we can tax our way out of this by taxing the wealthiest individual and corporations wouldn’t make a dent in our national debt.’ Here is an interesting article from the Manhattan Institute on this subject that you may find interesting:

    Taxing the Rich Won’t Pay for the Politician’s Promises

    When you say that, “economists have shown that a deficit in and of itself is not “bad” if used to avoid a worse economic state!” That is true, however, we have been deficit spending each and every year for as long as I can remember, in good and bad times. Our debt crisis is an issue with both parties and our representatives believe we have an endless supply of money, eventually the well will run dry and it may well cause runaway inflation.  

    Here is a link to a Forbes Magazine article about wasteful spending in the 2020 COVID relief bills.

    Is There Wasteful Spending In The Coronavirus Stimulus Bill?

    MIT economist David Autor and other economists studied the Paycheck Protection Program and concluded that “a lot of [the] cash went to businesses that would have otherwise maintained relatively similar employment levels.” He found that it cost $224,000 in taxpayer expenditure per job preserved, only preserving roughly 2.3 million jobs.

    Thanks again for taking the time to respond, I appreciate your feedback.