26 Jul 2019 Debt Presumes on the Future

One thing that gaggle in Congress can agree on is spending billions of our hard-earned dollars, while turning a blind eye toward the futures of our children and grandchildren. Yesterday, the House voted to raise the federal debt and spending limits to allow them to spend 1,000,000,000,000 (a trillion) dollars more than they collect for each of the next two years.

Our founding fathers are spinning in their graves as fast as the National Debt Clock. To raise a trillion dollars, without interest, they would have to set aside $1.58 MILLION A DAY for 243 YEARS!

The men who risked their necks to launch this great country were hugely concerned about debt. Cal Thomas of Tribune Media shared a few of their warnings yesterday:

• Thomas Jefferson – “We must not let our rulers load us with perpetual debt.”
• Alexander Hamilton – “Nothing can more affect national prosperity than a constant and systematic attention to extinguish the present debt and to avoid as much as possible the incurring of any new debt.”
• George Washington – “Avoid occasions of expense … and avoid likewise the accumulation of debt not only by shunning occasions of expense but by vigorous exertions to discharge the debts, not throwing upon posterity the burden which we ourselves ought to bear.”
• James Madison – “I go on the principle that a public debt is a public curse, and in a Republican Government a greater curse than any other.”
• John Adams – “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.”

Our country has experienced several periods of high debt, most of them caused by wars. The Revolutionary War, the Civil War and WWI, each raised the country’s debt levels to roughly 30% of the nation’s economic output, measured as gross domestic product or GDP. The Great Depression and WWII took debt levels as a percentage of GDP from 43% to a high of 112% in 1945.

Since 2009 our debt to GDP has surged from 82% to 106% in 2018. These spikes were caused by the Great Recession under President Obama’s watch and more recently, large tax cuts under President Trump.

While a fan of tax cuts because they help small business and the economy in general, without equal spending discipline our debt balloons. If unchecked, the Congressional Budget Office estimates that US debt to GDP will reach 150% by 2048.

The closest country match to that level is Japan who’s debt now hovers around 200% of GDP. Economic growth in that country has been stuck in a range between -1% to 1% for more than 25 years. Similarly, the US economy grew at only 2% for more than a decade. We called it the ‘new normal’ after the Great Recession, believing that economic prosperity experienced in our past was no longer possible due to our rising debt and declining productivity.

Why Does Debt Matter?

The biggest problem with debt is that it presumes on the future. It assumes that good times will continue to enable future generations to pay not only the increasing interest, but its principle. It robs future generations of prosperity. Instead of investing in the drivers of economic growth, they are trapped by their greedy predecessors into paying for their excesses.

Interest cost on the debt is expected to almost triple in the next ten years. This non-discretionary expense crowds out discretionary investments like education, R&D, and infrastructure. Growing government debt crowds out private initiative and capital, slowing investment, economic growth, jobs and wages. A debt-strapped government is less able to respond to crises and provide for the most vulnerable.

The government’s current spending seems unstoppable, especially given our broken and increasingly divided political realities. Republicans’ low-tax growth policies implemented without offsets to spending and Democrats’ open-ended giveaways, growing government, and charge by some toward Socialism all threaten to mushroom our debt.

Another politically unsolvable problem, at least in our current environment, is that of mandatory spending; that is Social Security, Medicare, Medicaid, federal retirement and others like them. Together they represent a full two thirds of our budget and are growing much faster than discretionary spending (defense, transportation, education, health, housing, etc.). See on the chart below how much faster mandatory spending is growing than discretionary. We are quickly losing the ability to control our own destiny.

Broadly speaking, there are generally two kinds of debt: Consumption debt and Investment Debt. The latter is generally considered good debt, if a strong economic or business case can made for the debt. Essentially, the expected return on the investment would exceed both the size of the debt and the risk of it not being repaid.

Debt is considered bad when there is insufficient or no offsetting return to repay it. Consumption debt is used to purchase goods or services like groceries, health needs, electricity, and entertainment, but no direct income comes from it like it would from an investment. Whatever income you had before the debt is now required to cover your existing commitments and now the added costs of the new debt. This kind of debt lives much longer than the enjoyment of what it purchased.

Most of our country’s debt is consumption and our political leaders seem to have no moral problem enjoying its benefits today, while deferring the pain of repayment to future politicians and taxpayers. We have voice and vote to impact our children’s future to a degree. I hope the issue becomes far more important than it has been in years past.

But you have profoundly more impact on your own use of debt. This may be a great time to review of your own spending caps and debt limits. We are happy to help you evaluate your spending and debt picture to ensure that debt has not presumed more on your future than you are comfortable with.