The Sobering Issue

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The Sobering Issue

According to the U.S. Congressional Budget Office, next year, the government is expected to incur a budget deficit of $469 billion and then another budget deficit of $536 billion in 2016. (Source: Congressional Budget Office web site, last accessed July 21, 2014.) From there, the budget deficit is expected to increase as far as the projections go.

Yes, the government’s own estimates are that our country will run a budget deficit every year for as long as the government’s forecasts go.

That’s quite unbelievable. We live in a country where the government (and politicians) feel it is okay to continue being “negative” every year, indefinitely. It’s like I’ve written many times: if our government were a business, it would have gone bankrupt long ago. But the government, through its non-owned agency, the Federal Reserve, has the luxury of printing paper money to fund its budget deficit and debt. If a business did that—printed money to pay its bills—that would be illegal.

Today, the U.S. national debt stands at $17.6 trillion with about $7.0 trillion of that incurred under the Obama Administration. (Is it any wonder a CNN/ORC International poll said this morning that 35% of Americans say they want President Obama impeached with about two-thirds saying he should be removed from office?)

But what happens to the budget deficit once interest rates start going up? We’ve already heard from the Federal Reserve that interest rates will be sharply higher at the end of 2015 and 2016 than they are now.

Earlier this month, the U.S. Department of the Treasury was able to borrow money (issued long-term bonds) at an interest rate of 3.38%.

Assuming by late 2016 long-term rates move to five percent (where they were prior to the 2008 financial crisis and the rate at which the U.S. government was borrowing money), the interest alone on the national debt will approach $1.0 trillion a year—a very scary thought.

There are two mainstream theories here:

The first is that interest rates will not rise because the U.S. economy is not strong enough to handle higher rates. Higher rates would kill the stock market and the real estate market. In fact, some believe the Federal Reserve will eventually need to start printing money again to spur the economy and cover the budget deficit.

The second theory is that as interest rates rise, the government will need to raise taxes and cut expenses to manage the debt. Mandatory payments from the U.S. government to its citizens (for things like Social Security) have risen 30% from 2008 to 2013. They are expected to rise further as the baby boomers retire, pushing the budget deficit higher.

I believe cutting payments to the poor and to seniors will be next to impossible. According to the Social Security Administration, 165 million American workers are covered under Social Security; 34% of them have no savings set aside for retirement and 51% of them have no private pension coverage (Source: Social Security Administration, April 2, 2014.) I don’t see Congress letting through more tax increases either.

My theory? Interest rates will have to rise to offset inflation. Our national debt will rise from its current 105% of gross domestic product (GDP) to 200% of GDP (just like Japan). That means we are headed for massive future budget deficits and a national debt of $34.0 trillion.

What the U.S. dollar and gold will be worth under a scenario where our national debt is 200% of GDP . . . a child could figure it out.

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