http://www.loathemygovernment.blogspot.com/2012/09/fun-with-math-making-our-16-trillion.html.
Although having a debt of $16 TRILLION is really, really bad, saddling each American family with about $140,000 each, it could get much worse before it gets better. We started doing that calculation last week when we used Obama's White House budget website, which shows that the $16 TRILLION is expected to grow another $3.4 TRILLION by 2017 under Obama's current budget assumptions. This would bring the total national debt to just under a whopping $20 TRILLION.
However, Obama's budget calls for some unbelievably aggressive growth rates in government tax revenue in each of the next five years, growth rates that have never been sustained over a five year period in the history of the country. Thus, we found the $3.4 TRILLION increase to be unfounded and highly unlikely not to happen. Using the long term average growth rate of the U.S. economy, around 3%, we recalculated the next five years' worth of tax revenue, keeping Obama's government spending assumptions unchanged. This results in another $7 TRILLION being added to our burdensome national debt, not his overly optimistic $3.4 TRILLION increase.
An additional $7 TRILLION in national debt theoretically adds another $61,000 or so to each American household's share of the Federal government debt. This would bring the total household debt responsibility to $200,000, a level that would never be sustained.
But it gets worse. Fortunately, for the political class and the country, the U.S. Treasury is paying record low interest rates to finance this ongoing and growing debt load. This is caused by what I call the "queen of the pigs" theory.
As most people know, many, many countries in Europe are economic basket cases. Greece, Spain, Italy, Portugal, etc. are having severe economic problems and their own outsized national debt difficulties, which has made their sovereign debt riskier. Riskier investments make it harder to get investors to buy your bonds and those that do buy, want higher returns for their risk. This has pushed the interest for some European sovereign bonds up into the 6-7% range.
The Chinese economy is slowing, the Japanese economy is still in a twenty year funk, the U.S. stock market has been volatile and generally providing low returns, and the U.S. housing market is still in the ditch. With so much economic uncertainty in the world, many investors are looking to park their wealth and money somewhere safe in order to not lose their principle.
The best place to do that recently has been with U.S. Treasury bonds. Basic economic theory prevails: high demand for a limited supply keeps your costs down. In this case, the demand is high for T-bills, the supply is limited, which pushes down the interest rates.
Thus, while we do have historically high national debt levels, the cost to service that debt is historically low. If you go to the official White House budget website and its EXCEL spreadsheets, you will find that the interest expected to be paid (about $224 billion) on the expected 2012 year end national debt level (about $16.3 TRILLION) is about 1.4%. Not a bad interest rate to be paying for such a large debt load.
Let's look at Obama's own numbers. By 2017, our national debt should be about $20 TRILLION according to the White House website. The cost of servicing that debt load in 2017, again, according to Obama's numbers, would be about $565 billion. This comes out to an overall interest rate of about 2.9%. Thus, our debt cost under this base case scenario will go from about $224 billion a year at a 1.4% interest rate to $565 billion a year at a 2.9% interest rate. Thus, Obama is planning to more than double the amount of taxpayer wealth diverted solely to interest payments and the interest rate we pay to service that debt in the next five years.
Hang in there, we are almost there from a math perspective. If you take Obama's 2012 expected tax revenue estimate and divide it into his expected interest payment budget line for 2012 you will calculate a number of 9.1%, i.e. about nine percent of Federal tax revenues will be used to pay interest. By 2017, he expects that number to increase by about 50% with about 14.4% of 2017 tax revenues to be used to pay for interest payments. All bad trends.
However, that debt load will have to be constantly serviced over time as the existing bonds are sold and new bonds issued. The very real concern is that at some point in time, the rest of the world's economic opportunities begin to improve. Let's say that somehow Europe struggles through its economic problems and gets itself on solid financial footing. Investors will start to look to Europe to increase their return on their wealth.
Let's assume that China gets out of its doldrums and with its large population starts humming again, from an economic perspective. An improving U.S. housing market and stock market may be better options for investors than getting 1.4% or so on its investment in Treasury bonds.
Thus, as the world's economy improves, including our economy, and the rating agencies, investors, and the rest of the world get more and more antsy about our ever escalating debt load, there is an excellent chance that there will be fewer and fewer investors willing to give the U.S. Treasury Department some of their wealth to invest. This will require that Treasury interest rates increase just to get money for servicing the debt and our deficit spending. Thus, those 1.4% and 2.9%interest rates may very soon be a pipe dream.
Let's assume that we start to look like Greece and Spain by 2017, given our ever rising debt load. Our interest rate would certainly no longer be so low. Let's assume that the 2.9% rate in 2017 is a more Greece-like 6%. Simple math would say that we would no longer be paying $565 billion a year to service our debt. At 6%, a $20 TRILLION debt financing cost would increase to $1.2 TRILLION a year, more than double up from $565 billion.
Under this scenario over 30% of the Federal government's tax revenue would go solely to servicing the $20 TRILLION debt.
If we assume that we are up to about 120 million households by 2017, on average every American household would have to pay $10,000 each just in 2017 just to pay for the debt servicing. Obviously, more taxes would then have to be collected to cover Social Security, Medicare, Medicaid, defense spending, and every other government function. Scary, scary numbers.
But we can make it worse without stretching the bounds of reasonability. We do not believe that Obama's revenue numbers are realistic, they are much too high. Let's assume that government revenue only grows around 3% a year for the next five years. Then, by 2017, the Federal government revenue stream is not $3.92 TRILLION, it is closer to $2.86 TRILLION. In this scenario, about 42% of every Federal tax dollar goes to debt servicing.
The good news, which is really really bad news, is that this may never happen. We may see an economic collapse long before we get to these 2017 numbers. If we get another recession within the next five years, highly likely, we may have such a suppression in government tax revenue that it cannot service the debt, leading to default. In that situation, any saving bonds or Treasury bonds that any American holds could be worthless, leading to economic hardship for many American families but especially elderly Americans who may have counted on those government securities for their retirement.
Going back to Obama's numbers, a 2017 best case scenario says that expected government spending, $4.5 TRILLION would quickly be reduced by $612 billion or 13% in order for actual tax revenue to equal actual expenditures, no more financing spending and deficit spending. Thus, best case in a default is that every government function, every Social Security check, every Medicare payment, every Federal employee salary, etc. would immediately be reduced by 13%. And I believe that the 13% is best case, it would likely be far worse.
There would be no immediate change/improvement in our economic situation after a default since no one would be willing to lend the Federal government any money. We would have to live only on what the government could tax collect with no deficit spending.
And these calculations do not even bring into account the likelihood of high or even runaway inflation. The Federal Reserve has done two rounds of "quantitative easing," which is nothing more than printing money and injecting it into the financial systems in the hope that it will eventually lead to economic growth.
The first two rounds of easing resulting in the printing of $2.3 TRILLION, money that is sitting somewhere in the banking system waiting for the right opportunity to be invested. If the Fed is not careful, if that investing comes all at once, inflation is likely to skyrocket, putting further pressure on the Federal government, raising interest rates dramatically, raising interest rates, and crushing individual household budgets and savings.
Not a pretty sight. But this is the path we are on. You may dispute some of my numbers, assumptions and calculations since I am not a financial or economics expert. I am just doing some simple, logical math with official government statistics and forecasts.
But I doubt anyone would arrive at a substantially different overall conclusion using any other approach. Using Obama's own numbers, we are heading for a fiscal meltdown that could happen within just a few years, taking our economic well being and our democracy with it. Using more realistic numbers than the official Federal government.White House view results in a much worse economic scenario.
Study Germany in the 1920s and Argentina a few decades ago to see what an economic meltdown and default looks like. Observe what happens to Greece and Spain in the next six months or so to see what is in store for us.
But there might still be time to get our outrageous Federal government spending habits under control. Tomorrow we will go through a detailed plan that will remove $9 TRILLION from our debt load. And best of all, it does that without raising taxes and with minimal impact to most American families.
It can be done. The question is whether it can be done by those sitting in the White House and Congress today. Their lack of courage track record says they cannot and thus, they need to all be removed from office on November 6, 2012 if we are to have any chance of avoiding what I have laid out above.
Note: for those of you who want to tinker with the Obama numbers we used above, go to the following web page for the original numbers and forecasts:
http://www.whitehouse.gov/omb/budget/Historicals
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http://www.unitedstatesofpurple.com/
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The United States Of Purple's website also provides you the formal opportunity to sign a petition to begin the process of implementing a Constitutional amendment to impose fixed term limits on all Federally elected politicians. Only by turning out the existing political class can we have a chance of addressing and finally resolving the major issues of or times.
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http://www.reason.com/
http://www.repealamendment
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