You might think we’re kidding. We’re not. Let’s look at each one.
Our Federal debt stands at over $19 trillion dollars. The interest we pay on our national debt is now larger than the entire Federal budgets under President Jimmy Carter less than 40 years ago. Yet we can’t recall one congressional or senate race in the 2014 mid-term elections or today’s election rhetoric where the Federal debt is a core issue. This debt is a real issue. It limits the agility of the Federal government to respond to a crisis. And it steals wealth from future generations, leaving them with a lower standard of living and quality of life than we are enjoying now. It is arrogance and selfishness to the highest degree. Yet few in our generation seem to care.
Interest rates are at an historic low. At the time of this writing, Prime is at 3.25% with the Federal funds rate being 0% – .25%. This is great for borrowing – both for government and private borrowers. But what happens when the rate goes up two percentage points? How much more in interest will the Federal Government have to spend if prime moves to 5.25% (not an unreasonable interest rate by historic standards)? Either the government will be paying much more in interest or they may just decide to not pay all of the interest owed to the banks, which means that the banks may end up charging you to keep your money. They tried this Cyprus a couple years ago and, as you might expect, it didn’t work out well. A rise in interest rates may mean higher taxes for you. The Feds may decide to tax your 401K or other tax-deferred retirement instruments.
Unfunded Pension Plans
We have previously discussed the unfunded pension plans at the State and Federal levels. This adds an additional ~$6 trillion to our debt structures. What do you think will happen when the governments can’t send out the checks public employees are expecting? We predict social unrest on the scale of Greece or Ferguson, MO. Some will just take “justice” into their own hands, looting private citizens of their physical wealth or looting businesses. We don’t think we’re overstating how volatile this issue will be in the future.
Nearly a third of our roads and bridges are now structurally deficient – meaning that while they are safe, they are not reliable to meet the future needs of our economy. This includes roads, bridges, train tracks and airport/air safety components. It is estimated that to get all this fixed will cost another $1 trillion dollars. Our economy depends on the infrastructure that was built in the 50’s and 60’s. Where is the money going to come from? We’ve already spent it.
Lack of Retirement Savings
The average boomer has saved less than $50,000 toward retirement, while they will need $1M or more to sustain them. Where will this money come from? We predict the boomers – the most self-absorbed generation this planet has ever seen – will demand the government sustain them in their old age. We predict that the younger generations will note how their wealth has already been spent by the boomers and significant inter-generational conflicts will emerge.
What happens when people don’t have enough to live on? They do whatever they can to sustain – to survive. Sometimes those actions are not pretty and can be illegal. But if a critical mass is committing illegal crimes, what is the government going to do about it? They won’t have the resources to arrest and prosecute everyone.
We have built such an entitlement ethos in this society that we fear the majority of Americans now feel they are entitled, by virtue of their existence, to have certain comforts and assurances economically. They really don’t care who else gets hurt in the process – they just want what they want when they want it. They want free stuff and have been told for decades that they are entitled to it. This can’t sustain. This system will implode. Maybe not today and maybe not tomorrow. But this system of deficit spending to keep free stuff flowing will implode and end someday. When it does, we will all pay the price in the form of wealth deflation, increased risk to our personal security, loss of jobs as businesses constrict and general societal unrest.
What can be done?
The first thing that needs to be done, in our opinion, is to stop the bleeding. The Federal government needs to balance its’ budget each year and not spend more than what it takes in.
After that, the second thing to do is to have the Federal government fully fund its’ pension obligations while building into the annual budgeting process debt service payments. At $19T+ of debt, it would take nearly 40 years to pay off all of the debt, assuming we made debt payments of $500B/year. But that amount represents 1/7th of our annual budget. No present-day politician will support this. Yet we can’t grow our way out of our debt and we can’t just continue to see our debt grow, so after stopping the bleeding, we need to start a process of paying the debt off.
What would we change in the Federal Budget? Unwinding the scope and influence of the Federal government will be nearly impossible, since so much of the spending and influence is on automatic pilot via hundreds of legislative acts having been passed and signed by both parties. But this is what would need to be done. A stronger commitment to Federalism and States rights over the next 100 years while future generations focus the Federal government on what is its core functions is what is needed. We’re not holding our breath.
Finally, the population needs to move away from wanting and needing free stuff from the Federal Government. Again, we doubt this will ever happen.
So, what will happen?
Eventually, our economy will implode and we’ll go bankrupt as a nation. When that happens, we don’t know what the outcomes will be. But we’ll guess that those outcomes can’t be good. We can hope, pray and work for the best, but unless these trajectories are reversed, we don’t see a bright future for this country.