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Unreasonable Expectations – The Debt Crisis

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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!

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Currently, the national debt [3] is just under $28 trillion dollars and is expected to reach or possibly exceed 100% of our gross domestic product (GDP) in 2020. The last time we attained this lofty perch was during WW II. Seventy percent of our GDP is generated by consumer spending!

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 are at all-time highs and the tech sector growth has exploded this past 9 months. According to a recent Reuters’ article [4], “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 [5], 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.

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:

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.

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:

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Disclaimer: The information provided may not cover all aspect of unique or special circumstances, federal regulations, medical procedures, and benefit information are subject to change. To ensure the accuracy of this information, contact relevant parties for assistance including OPM’s retirement center. Over time, various dynamic economic factors relied upon as a basis for this article may change. The advice and strategies contained herein may not be suitable for your situation and this service is not affiliated with OPM or any federal entity. You should consult with a financial, medical or human resource professional where appropriate. Neither the publisher or author shall be liable for any loss or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.

Last 5 posts by Dennis Damp