Debt: A Legacy

May 8, 2018

Debt kills. Like cancer. A silent killer. Imbuing its victims with anxiety. Filling their brains with cortisol and other stress-inducing hormones. Degrading their health. Mental stability. And quality of life.
Eight years ago, a beloved client died. Great guy. Loved by all. A longtime entrepreneur, his business employed a close-knit group. He put multiple kids through college. And was the life of every party. Upon his passing, however, Pandora's box opened. His pride had prevented him from sharing a dark secret. His business was leveraged to the hilt. Millions of dollars in debt.
His wife and kids were left to bury him. Pay homage to a life well lived. And then to worry about the hole in which they now found themselves.
Two weeks ago, the Congressional Budget Office (CBO) issued its 10-year outlook. For the fiscally pragmatic? The news was not good.
Over the next decade, the annual federal deficit will average $1.2 trillion. During that period, it will rise from 3.5 percent of GDP (the nation's annual economic output) in 2017 to 5.1 percent by 2027.
Correspondingly, the national debt -- driven as it is by annual deficits -- will rise from $15.7 trillion to $28 trillion. Nearly doubling. And surging from 78 to 96.2 percent as a share of GDP. The highest such percentage since the end of WWII.
Only, back then we'd just finished saving the world from murderous fascist dictatorships. Today, we're simply making sure everyone's comfortable.
Meanwhile, our political class has provided a disturbing amount of empirical evidence as to its complete lack of cojones. Leading us to believe that the tax cuts slated to disappear in 2025 will not be removed. And the defense hawks and defenders of social justice programs are unlikely rescind anything granted to their constituents thus far. Which means we must more than casually apprise ourselves of the CBO's estimates stating that if current policies continue -- which they will -- rather than sun-setting at pre-determined dates, the deficit will rise another $2.6 trillion this next decade. To a staggering $15 trillion. Pushing the national debt to an astonishing 105 percent of GDP.
That level has been exceeded only once in the nation's history. And could represent a fork in the road from which we may never turn back. Of course, your children and grandchildren have no idea as to any of this. But they will be left with the tab. One that will permanently inhibit their chances at acquiring any semblance of financial prosperity.
D.C. obviously doesn't care. Do you?
In the near term, the growth benefits from tax reform may help to allay these fears. As the CBO projects that last year's tax cuts will boost growth to 3.3 percent in 2018. And to a respectable 2.4 percent next year. After which growth is expected to subside to 1.9 percent. Where it is projected to remain for much of the following decade.
Nor has one political party presided over this mess more than the other. Neither the Democrats nor the Republicans have shown any iota of fiscal restraint.
President Bush spent a fortune in the Middle East. President Obama doubled the national debt. Then oversaw a 35 percent increase in the federal budget deficit in his final year in office. President Trump has increased military appropriations. And granted tax cuts. Both of which we agree with. But not at the cost of fiscal sanity. All the while, Congress has spent like a horde of drunken sailors on shore leave.
Most of our future debt concerns stem from runaway entitlement programs. Programs that will eventually demand the lion's share of the nation's annual nest egg. Social Security. Medicare. Medicaid.
Worsening matters, in a rising interest rate environment, the cost of the nation's debt service -- the interest payments on the national debt -- will only increase year after year.
Frighteningly, the nation's political class (Not leaders, as leaders are those who make difficult decisions, and these people only serve their political careerism) has refused to do a thing about this simmering volcano. Because our coddled society will never vote for a reduction in benefits. Enamored, as we are, with extending those benefits whenever possible.
Society seems ever wanting of more government assistance. Consider Mark Zuckerberg's preposterous "universal income" idea. Or Bernie Sanders' offers of government-paid tuition. Or the desire to invite millions of unskilled immigrants into the country when -- at the very least -- we could ensure that a set percentage of these individuals bring skills that would immediately benefit the nation's economic productivity. And thus the nation as a whole.
If your household is destitute, would you be acting prudently by filling it with flat screens and new furniture? So, why does no one bat an eye as the nation does exactly that?
Yet, a recent Bloomberg article stated that "Americans' love of pricey pickups and sport utility vehicles is stretching their wallets." The article mentioned that Ram "Big Horn" trucks are selling like Playboys in my eighth-grade school yard. Only these trucks cost $70,000. With an average loan term of 73 months.
With a six-year loan term, don't be surprised to see most of these loans end in financial disaster. Like home mortgages last decade. Where the borrowers default on an asset in which they are upside-down.
Another debt-driven vulnerability?
Consider the student-loan market. In 2009, total student-loan debt was about $771 billion. A huge number, right? By October last year, that number had soared to around $1.5 trillion. Almost doubling.
Student-loan debt is a financial disaster in the making. You can make a case that we could see hundreds of billions of dollars in defaults. Of course, these are the same millennials who were buying Bitcoin and other crypto currencies last year. Right as it turned into bubble. And assets fell by as much as 70 percent.
Excuse me. I don't mean to rant.
If we won't abdicate our big spending ways, and our out-of-control entitlements, then we must figure out a way to enhance the nation's productivity. And drive the positive side of the balance sheet by pushing GDP growth higher.
We could increase productivity by stemming the flow of women leaving the workforce. Invest in programs that allow ambitious females to work while also serving as good mothers to their children. Europe has had success in this area.
We might also increase the number of working-age immigrants entering the country. Especially those with skills sorely lacking throughout various tranches of the workforce. This might require reducing the number of slots dedicated to family reunification, which most Democrats oppose, while also increasing the number of immigrants, a reversal of the Trump administration's policy.
But difficult situations require difficult decisions. So, we'd best begin making some. Because when you couple an aging society with falling economic productivity, you're essentially asking for a fiscal miracle if we wish to avoid a debt crisis without making some near-term policy changes. We might begin by asking Congress to adopt a fiscal policy consistent with these realities. Instead of pollyannically currying to every special interest group.
Nobody ever wants to be the pragmatic ant. Always preparing for winter. Living within his means. Planning for whatever lay ahead. It's more fun to be the violin-playing grasshopper. Because life is always a party. And gratification need never be delayed.
Aesop reveals that, once winter arrived, the ant was prepared. Allowing he and his family to comfortably bide their time as the frozen winds blew overhead. Meanwhile, our fun-loving grasshopper never made the tough decisions. And was wholly unprepared for the inevitable freeze. When spring arrived, he was never seen again. Though his survivors inherited a violin. And a legacy of debt.
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