Broken Promises

Consumer debt, corporate debt, and government debt are all going up.  But that’s not all.  Margin debt – debt that investors borrow against their portfolio to buy more stocks – has hit a record of $642.8 billion.  What in the world are people thinking?

Clearly, they’re not thinking.  Because thinking takes work.  Most people don’t like to work.  They like to pretend to work.

Similarly, people may say they care about debt.  But, based on their actions, they really don’t.  When it comes to the national debt, the overarching philosophy is that it doesn’t matter.

Government debt certainly doesn’t matter to Congress.  Nor does it matter to the President.  In fact, their actions demonstrate they want more of it.

Big corporations with big government contracts want more government debt too.  Their businesses demand it.  They’ve staked their success on the expectation that the debt slop will continue flowing down the trough where they consume it like rapacious pigs.

The higher education bubble is also based on a faulty foundation of debt.  The business model generally requires signing credulous 18-year-olds up for massive amounts of government backed student loans.  From what we gather, federal student loan debt is closing in on $1.4 trillion.

Now what would happen to all these high paid professors and fancy country club style college campuses without all this government sponsored debt?

The automobile business is also based on a model that demands more debt.  Outstanding auto loan debt is now somewhere around $1.2 trillion.

Fundamental Divergence

You see, this is how the world works circa 2018.  After decades of expanding consumer, corporate, and government debt, the entire economy has been retooled and restructured to be entirely dependent on it.  What’s more, Federal Reserve policies have promoted it.

The fact is we’re on a collision course with disaster.  Take government debt, for instance.  Over the last decade, nominal gross domestic product (GDP) has increased from about $14.7 trillion to about $19.3 trillion.  Over this same period, the national debt’s increased twice as fast; it has doubled from $10 trillion to $20 trillion.

In short, there’s a fundamental divergence between economic growth and government debt growth.  Broadly speaking, the U.S. economy’s growing at a rate of roughly 2.5 percent a year.  And U.S. government debt’s growing at a rate of roughly 6 percent a year – or more.

Over an extended period, this divergence results in two dramatically different growth curves.  Government debt has now overtaken GDP.  Over the next decade, government debt – which is projected to spike up another $10 to $15 trillion – will absolutely dwarf GDP.

Presumably, at some point between now and 2027 the economy will slip into reverse.  GDP will contract.  At the same time, government debt will accelerate as Washington’s compelled to do something – like spend borrowed money – to somehow jumpstart the economy.

While this divergence between GDP and government debt is problematic, it ignores a much larger story.  Specifically, it ignores the story of unfunded liabilities…

Broken Promises

One generation always incubates the bacteria of the ailments which dominate the next one.  Yesterday’s actions reared the things which control the present.  So, too, today’s actions breed the things which will control tomorrow.

At this very moment, we’re living with several unfavorable gifts from our forbearers.  Namely, social safety nets constructed many decades ago that don’t pencil out.  These safety nets are now stretching and fraying at the seams, at the precise moment when tens of millions of Baby Boomers will rely on them most.

The first ones into a Ponzi scheme always make out like bandits.  For example, Ida May Fuller cashed the first Social Security check, Check No. 00-000-001, dated January 31, 1940, in the amount of $22.54.  With just one check, she nearly recouped the full value of the $24.75 that she paid in.

However, Fuller continued to cash these checks until she died on January 27, 1975.  In total, the $24.75 she paid in, ended up paying $22,888.92 back out to her.  Is it any surprise this system is now on the fritz?

Medicare, another marque social safety net of the U.S. government, is also based on the broken promise that people can get more money out of something than they pay in.  Like Social Security, Medicare faces a funding gap that’s mathematically insurmountable.  People that have paid into these systems their entire working lives have been set up for a grand disappointment.

According to the recently released 2017 Financial Report of the United States Government, which was alerted to us by Simon Black, the “total present value of future expenditures in excess of future revenue” for Social Security and Medicare represents a shortfall of $49 trillion.  How in the world are taxpayers going to fill this $49 trillion funding gap, which is above and beyond the exploding national debt?

What we have here, folks, is a conundrum.  There’s no respectful way out.  But there are several shameful ways out:

Uncle Sam can drastically cut or cancel its commitments to Social Security and Medicare recipients, and leave them flapping in the wind.  Uncle Sam can continue to pile these obligations onto the backs of younger workers via escalating taxes, thus subtracting productive value from the economy and dooming it to a century of declining growth.  Or Uncle Sam can unconditionally trash the currency, inflate it away, while turning the United States into a banana republic – if it’s not already one.

Most likely, Uncle Sam will try all three options in order of political expedience.  Look for this intergenerational conflict to come to a head during the next recession, which may arrive sometime in the next 18-months.


MN Gordon
for Economic Prism

Return from Broken Promises to Economic Prism

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