Does Government Debt Really Matter?

Government DebtThe numbers on the US Debt Clock are spinning at a dazzling pace. US government debt is now over $21 trillion, $174 thousand per taxpayer. Add another $3 trillion for debts of state and local government on the stack.

Unfunded federal government promises are almost $113 trillion, $900,000 per taxpayer, not including another $6 trillion in state unfunded pension liabilities.

It’s fiscally impossible for the debts to be repaid. Governments borrow money and make political promises on the backs of future generations. If the numbers were double (or triple) what they are today; would our lives be any different? We can’t pay it back, why not just continue frivolously spending as long as people are fool enough to lend us money?

“The Budget should be balanced, the Treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, and the assistance to foreign lands should be curtailed, lest Rome will become bankrupt.”

Cicero, 55 B.C.

Does anyone really care?

Ignore the political class and their allies. Here is an example.

Nobel Prize winning economist Paul Krugman has an impressive educational pedigree – on paper. While he may be an economics professor at Princeton and the London School of Economics, he tarnishes the reputation of all economists, putting politics ahead of common sense.

In October 2016, anticipating the election of Hillary Clinton, he wrote, “Debt, Diversion, Distraction”.

“Are debt scolds demanding that we slash spending and raise taxes right away? Actually, no: the economy is still weak, interest rates still low…and as a matter of macroeconomic prudence we should probably be running bigger, not smaller deficits in the medium term. (Emphasis mine)

…. So my message to the deficit scolds is this: yes, we may face some hard choices a couple of decades from now. But we might not, and in any case, there aren’t any choices that must be made now.”

After the election, Mr. Krugman reversed his position writing, “Deficits Matter Again”.

“…. Eight years ago, with the economy in free fall, I wrote that we had entered an era of “depression economics,” in which the usual rules of economic policy no longer applied…deficit spending was essential to support the economy, and attempts to balance the budget would be destructive.

…. But these predictions were always conditional, applying only to an economy far from full employment. That was the kind of economy President Obama inherited; but the Trump-Putin administration will, instead, come into power at a time when full employment has been more or less restored.”

In October 2016 the economy was “still weak” and we shouldn’t worry about deficits or debt for a couple of decades. Less than 80 days later the economy magically changed and now deficits matter?

It’s political crap! When the party in power implements their financial agenda, whether it’s more spending or tax cuts, the minority party screams about unsustainable debt. When the process reverses, the charade continues and the new minority party screams about the debt.

The Undeniable Truth

With few exceptions, the political class doesn’t give a damn about the debt. The politicos use the tax system and government spending to buy votes to keep them in power.

They kick the can down the road; secretly hoping any negative consequences happen when they are out of power, enabling them to make political hay and convince the public they should rule forever!

Their behavior won’t change; they will continue to pile up debt until the citizens revolt!

If the politicians don’t care, should we?

Prior to the recent tax cut, The Chicago Tribune reported:

“If the House GOP tax plan becomes law, nearly 81 million Americans – 47.5 percent of all tax filers – would pay nothing in federal income taxes next year.”

Those who pay no taxes (particularly when receiving government handouts) probably don’t care about the deficit.

What about the remaining 52.5% that are working their tails off, seeing their hard-earned tax dollars (and more) being spent by an irresponsible government?

Can something bad really happen?

Common sense economics would indicate, governments creating money out of thin air might temporarily prop up the economy, but eventually it would create a large debt bubble. When it pops, expect catastrophic consequences.

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In 2008, when the government started bailing out the banks, many urged caution, suggesting high inflation and our unsustainable debts would finally come home to roost. It hasn’t happened – yet.

Pundit Bill Bonner looked at the stock market and took a critical view of “Trump’s Quack Economists”:

“Markets don’t like uncertainty. …. Presidential advisors Peter Navarro and Larry Kudlow – wrong about just about everything for just about forever – could be right this time.

Maybe the economy really is as strong as an ox. And maybe stocks will go up from here to eternity. But it’s not what we see….

Not that we are always right. ….

Yes…our error was that we misjudged the power of wrongheaded claptrap. Fake money talks louder…and BS walks further than we thought! (Emphasis mine)

We thought the fake money-pumping scheme had reached its end back in 2009.

We were wrong.”

When economists criticize and advise the government; it makes little difference; elected lawmakers show zero fiscal responsibility. The train continues down the track, full speed ahead….

Yes, we should care, and yes bad things can happen. Count on the predictability of the political class. Anyone with wealth or income becomes a target to finance their political spending. We need to protect ourselves.

What economists should we listen to?

I prefer economists with no political agenda – genuinely concerned about helping average hard-working citizens navigate the current and future potential challenges ahead.

Good friend, Dr. Lacy Hunt is tops on my list. He “calls them like he sees them” without any bias. He’s an excellent educator helping us navigate some difficult economic waters.

I recommend his company’s recent Hoisington Investment Management Quarterly Review and Outlook, it’s a primer.

It begins with a discussion of the Fed’s policies over the last decade:

“Nearly nine years into the current economic expansion, Federal Reserve policy actions appear to be benign…. Changes in the reserve, monetary and credit aggregates, which have always been the most important Fed levers…indicate however that central bank policy has turned highly restrictive. These conditions put the economy’s growth at risk over the short run, while sizable increases in federal debt will serve to diminish, not enhance, economic growth over the long run.” (Emphasis mine)

It’s not just a US problem:

“No matter how U.S., Japanese, Chinese, European or emerging market debt is financed or owned, and regardless of the economic system, the path is stagnation and then decline. Even central bank funding of debt will not negate diminishing returns.”

Might the historical cure make things worse?

“While many believe that surging debt will boost economic growth, the law of diminishing returns indicates that extreme indebtedness will impede economic growth and ultimately result in economic decline. …. The standard of living cannot be raised without increasing output.” (Emphasis mine)

Increased debt equates to increased spending and economic output – theoretically! While debt, both government and private, has reached historic levels, they question the premise over the long term.

Talk about diminishing returns…. In 2007, each $1.00 of global public and private debt increased gross domestic product (GDP) by $.36. In 2017 it dropped almost 14%, to $.31. The US dropped about 11%, from $.45 to $.40.

Where are we headed?

“As debt continues to increase, real GDP starts to fall. At this point, debt has reached the point of negative returns, resulting in the end game of extreme indebtedness.” (Emphasis mine)

What is the end game?

When Dr. Lacy Hunt uses the term “end game” we should all take heed; he chooses his words carefully.

Their current newsletter reinforces what we intuitively believed a decade ago, you don’t cure a debt problem with more debt.

How much longer can we borrow and spend before we see the inevitable economic decline? Might we face another great depression?

Might the end game be controlled by others? When creditors lose confidence in the US, the economy and the dollar, they’ll start unloading dollars, causing interest rates to rise – negatively impacting the economy.

No one knows what or when

At the end of a Casey conference a few years ago, the speakers were seated on the stage and the audience asked questions. The main concern – when and what will the end game look like.

They had no idea. Some made predictions, most felt the wheels were soon going to fall off soon – they were wrong.

One participant asked, “Inflation or deflation?” The response of the experts was, “Yes.” The consensus was we could experience high inflation which might be the last major blow to the economy; and then quickly move into deflation and perhaps a major depression.

No one knows for sure how it will shake out, but it won’t be pretty.

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What can we do?

While government debt may not matter to the political class, it should matter to everyone who hopes to save and retire comfortably.

Prepare for the worst and hope for the best. Diversify, own real assets and not just paper. While many have been wrong on the timing, Dr. Hunt has clearly highlighted the trend. Take heed! Those who use some common sense and take some reasonable precautions will fare much better than most.

On The Lighter Side

The National Geographic Channel ran a cool show about the Black Hills of South Dakota. Jo and I were fascinated by the annual buffalo round-up in Custer State Park. They bring in around 1100 head to a corral, tag them and give them shots.

Motor HomeTwenty years ago, we sold our house and bought a motor home and decided to fulltime it, touring the country. Our motor home adventures turned out to be some of the most fun years of our lives.

We towed a small Jeep and took off on our first trip – to the Black Hills, with many stops (Graceland, Branson and Deadwood) along the way. Mt. Rushmore is incredible!

BuffaloThe highlight of the trip was heading down a gravel road and finding the buffalo herd. They were off in the distance and beautiful. They started toward us and, all of a sudden, we were in the middle of the herd as they crossed the road. Many were bigger than our little jeep. Our hearts were pounding as we hoped nothing spooked them causing a stampede. I can still feel the excitement as I type….

The annual round-up is a big thing; people bring their lawn chairs as the cowboys and cowgirls bring the herd into the corral. Jo remarked she wants to go. It’s on the bucket list!

And finally…

When it comes to the national debt, this cartoon sums up how many people feel:

National Debt Humor

Until next time…

4 comments

  • Martin Phillips

    The debt of any government on the planet matters, some governments more than others. So does the debt of all people and all businesses. I am not American, but I live in America. I am amazed at how Americans continue to look inward when they should be looking outward. Many other countries carry large debt. It is the current fashion, but let us turn to America in isolation because that is the current policy stance. For America to trade in the World there has to be reciprocity. Other countries have to see America as a “going concern” (an accounting term). The same is true for how America sees other countries. America is not self-dependent, although many Americans seem to think it is.

    The number one creditor to the American government is China followed at some distance by Japan. America and China have every incentive to collaborate. Unfortunately, America only knows how to dominate and until it learns how to collaborate things will remain difficult. China’s US debt holding is so large, it is impossible to sell it quickly, if at all.

    China has been diversifying its trading interests for some time now because it knows it cannot rely on America. The American mindset is not right now for how the future is going to play out. America seems to be able only to go to war. This is a futile course to follow. Amassing more and more debt will only increase this military outcome.

    America needs to remain in the different trade agreements and not walk away from them. They need to improve the trade deals for all concerned and forget the lose/win mentality that is so pervasive. It has no place in how the World is changing. There are far more people working on the future outside of America that are working on the future inside America today, and many of those working on the future in America are immigrants.

    Lastly, the increasing debt is not a fiscal or monetary policy issue. It is a social issue on a global scale. The debt cannot be corrected by America alone and it doesn’t need to be. America has colossal assets that do not need to be valued using the isolationist methodology currently in vogue. The debt will only become a problem if America allows it to be a problem.

    • Dennis Miller

      Dear Martin,

      Thank you for your thoughtful remarks.

      While I agree with everything you said, I am a believer that individuals and countries need to make sure they get their act together. Look at what happened in Argentina last week; I think they raised interest rates to 40%.

      Debt is not only a social issue, but a political one. When Herbert Hoover and Roosevelt were running against each other during the Great Depression, Hoover wanted to subsidize business to create jobs, while Roosevelt wanted unemployment compensation. Hoover said, “The minute you allow the public direct access to the treasury you will create chaos beyond anything mankind has ever known.” The real problem is not the public as much as the political class who has turned spending billions in borrowed money to buy votes. That is not just the US, but it needs to be fixed. Not sure how, but congressional term limits would be a good place to start.

      America has always been somewhat isolationist by the geography, bordered by two countries and two oceans. It’s more than geography, it’s an attitude. My guess is a good number of Americans have never left this country, unlike many in Europe for example.

      We can only hope that each individual is protecting their life savings because Argentina, Zimbabwe and Venezuela have shown the world what happens when debt is out of control.

      Best regards,
      Dennis

  • Jim

    So I will put my two cents in, and obviously I am going to sound like one of those conspiriatorial nuts out there. But here we go.

    Are people really foolish enough to believe that almost the entire worlds economies have been slowly amassing massive amounts of debt, all at the same time, by accident? In my conspiratorial mind I fully believe that the powers that truly govern the world, call them the Elite, the Illuminati, or whoever, are going to purposefully amd simultaneously collapse the worlds economies so that their plan of population control and world domination will be finally be implemented.

    What we are seeing is patient gradualism. Boil the water slowly and the frog never makes it out of the pan, he is eventually cooked.

    Not sure if it will happen in my lifetime or my children, but there will be a day of reckoning like the world has never seen before. Everyone better have their financial and spiritual house in order.

    JK

    • Dennis Miller

      Dear JK,

      You will get no argument from me. I think one more point should be mentioned.

      Currencies trade in pairs. When one country rises, another should fall. If the governments of the world are coordinating their spending, there is some parity among their currencies. It’s tough for the consumer to find good options to protect against loss of buying power. Add in what Ed Steer discusses regularly, manipulation of the gold market price, and it makes it more difficult for the consumer to protect their buying power.

      It’s tough to predict exactly what will happen, but sooner or later it will crack. I like your comments, “Everyone better have their financial and spiritual house in order”…. I fear a lot of seniors in particular will be hurt.

      Best regards,
      Dennis