The National Debt
“How much longer can we go on?”
The National debt has doubled over the last eight years from $10T to roughly $20T. The good news is that interest rates on the debt have been historically low. The overall interest for 2016 on the debt was 1.24% resulting in interest expense of $240B for the year.
This may no longer be the case. The federal reserve has stated that it may raise interest rates as many as 3 times in 2017.The normal rate hike is .25%. If the Fed follows through with these three rate hikes the resulting increase in the interest rate on new sales of government securities would be .75%.
How are we going pay for this additional interest? This is just a guess, but I think we’ll probably wind up borrowing it. The reality of borrowing money to pay for interest on the debt is one of the most absurd ideas ever to come out of Washington DC. This is not a new absurd idea. Congress has been doing this for years. It’s like borrowing money to pay your mortgage or using one credit card to off another. Eventually you will run out of credit or you will run out of credit cards.
One of the main goals of the Trump Administration is to create new jobs by bringing business back into the US. He’s talking about high paying manufacturing and construction jobs not $10 an hour retail jobs. These are the kind of jobs that make it possible for people to buy homes or purchase a new car when needed or take one’s family on a vacation. This used to be called “The American Dream”. These type of jobs would also spur economic growth, create wealth, and bring a more optimistic outlook to the country.
The other part of the president’s plan is to lower both corporate and individual taxes and to reduce job killing regulations. When you put both parts of this strategy together, the economic environment is there for businesses to invest and grow.
If the president is able to enact his policies, there would be a higher probability that the growth rate of the economy would increase from the paltry 2% or less, during the Obama years, to between 3% and 4%. This would add billions in tax revenue to the treasury and have a positive impact in reducing yearly deficits. This would result in slower growth of the National Debt.
Taking into account all of these proposed policy changes, this basic fact remains. No matter how prosperous the American economy becomes, in my opinion, no possibility exists that we could ever grow our way out of the $20T hole we are currently in.
Growing the economy and creating jobs is only half the equation. The second half of the equation is cutting spending. It is by far the most difficult, the most painful, the most controversial, and the most political. The political aspect of cutting spending is the main reason why it hasn’t been done.
We pay our elected officials hundreds of millions of dollars a year in salaries (it’s probably a lot more than that), staffer salaries and benefits, rent on local offices, travel and God knows what else we pay for. We are not getting our money’s worth. There’s an old saying. “ Thank God we’re not getting all the government we pay for.” I happen to agree with this. But the reality is that we are paying a lot of money to a lot of people on both sides and the job just isn’t getting done.
Our elected officials on both sides must shoulder the responsibility for this mess. However, we as citizens must share part of the blame. It’s easy when you live in a country like ours to become complacent. It’s easy to get lost in your life. You get up in morning, go to work, take your kids to soccer practice or dance class or whatever other activities that are available for them. We are a busy people with a lot of things to do. Sometimes it’s easier to just let the government take care of things. The only problem is that you will wake up one day and the country will be on the edge of the fiscal cliff.
Some of our politicians are offering free government benefits to people in an effort to get votes. An example of this occurred during the last presidential when Bernie Sanders was in favor of giving free tuition to anybody who wanted it. This is not why I pay taxes.
I would like to end this by putting our debt situation in perspective. The country of Greece, which is the poster child for government debt, has the highest national debt, as a percentage of their GNP, of any western country that I am aware of. It stands at 175 % of their GNP. The US debt currently stands at 115% of GNP and is going up.
As long as the growth rate of the US hovers around the 2% level where it’s been for about 7 years, yearly deficits will continue to be in the $500B range or more depending on how much interest rates rise and how successful congress is in controlling spending.
There are other western countries like Italy, Spain, and Portugal whose national debt is also very high as a percentage of their GNP. Is it just a coincidence that the governments of these countries all lean toward socialism. I think not.
If we continue on our present path and fail to make changes to the way our government spends money, eventually we will be facing an economic crisis. The EU bailed out Greece with a substantial loan package. In return Greece had to agree to severe budget cuts and also had to agree to meet economic benchmarks. If we get into financial trouble I don’t know what country, or group of countries, could or would, bail us out.
My thoughts on Cutting Spending, The Second Half of the Equation, will be forthcoming in Part 2 of this article on the National Debt.