Oh Lord, won't you buy me a Mercedes Benz?
My friends all drive Porsches, I must make amends.
Janis Joplin 1971
Tonight I want to talk about the US debt situation, and the effect it will have on our economy. You probably either watched or heard about the recent dispute that went on between Congress and the President regarding the debt negotiations. From my end, I loved it. It was pure theatrics. The entertainment value was off the charts. Neither side proposed a plan that would come remotely close to solving our debt problem, but that did not stop us from seeing more fake drama than a reality TV show.
Unfortunately, the issue is major and will ultimately have a catastrophic effect on our economy. So let's break it down. The debt is not a Republican or Democratic problem; it's a math problem. Fortunately, I passed third-grade math, so I got this.
Right now we owe about 14 trillion dollars to our creditors. This simply means that we have spent more money than we have taken in, and we have to borrow to make up the difference. This is no different than someone taking out a credit card and running up a bill that is larger than the amount of money that they make at work. But instead of buying big-screen TVs and iPads, the government spends their money primarily (about 85%) on three things: the military, Social Security, and Medicare/Medicaid. The government receives money from taxing us.
Not only do we currently owe the 14 trillion, but the number is rapidly increasing. We spend approximately $3.6 trillion a year and we collect only about $2.1 trillion. So each year the debt rises more than 1.5 trillion. This is why the recent debt negotiations were such a joke. They're talking about cutting a possible 1-2 trillion dollars over the course of 10 years, when our debt is 14 trillion and we add 1.5 trillion every single year. We’re in serious trouble here, folks.
Now let me throw out one other thing to you. When other governments lend us money, like China, who we owe more than 1 trillion dollars, we have the luxury of paying them back at incredibly low interest rates. For example, the current interest rate on the 10 year Treasury bond is approximately 2%. Imagine only having to pay 2% on your personal credit card. What is the reason we have the luxury of paying back the money at such a low interest rate? It's because historically the dollar has been seen as the ultimate safe haven place to park your money. Countries were willing to lend to us at such low interest rates because they considered the United States a sure thing to pay the money back. As our debt situation gets worse and our financial condition deteriorates, I expect not as many governments will be so eager to lend us money, at least at such a low interest rate.
If this happens the United States will of course still have to borrow money for all our programs. If the Chinas and Japans of the world are no longer willing to lend us money at 2%, we have to offer them a better interest rate. The riskier your country's financial situation the higher the interest rate you have to offer. That's why Greece was recently offering lenders 22%.
Right now we pay approximately $400 billion a year just on interest alone to our creditors. If the interest rate just goes up 1 or 2% more, which I think is a lock, our interest payments will skyrocket. Lastly, one other thing that I think is going to make the debt continue to get worse is Obamacare. I think insuring 30 million additional people will cost far, far more than the Congressional Budget Office estimated. We’re going to owe 25 trillion shortly.
I’ll discuss the 2 options the government has to avoid a financial catastrophe in another blog. Have a good night.
JR
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