The increasing levels of consumer, corporate, and government debt have become a pressing concern. Among these, margin debt—borrowed against investment portfolios to purchase additional stocks—has reached a staggering $642.8 billion. One has to wonder: what are people thinking?
Clearly, critical thinking is in short supply. Genuine contemplation requires effort, and many seem disinterested in such exertion, preferring to merely pretend.
Similarly, while many claim to be concerned about debt, their behaviors suggest otherwise. It appears that when it comes to national debt, there is a prevailing belief that it is inconsequential.
Congress and the President certainly do not appear to regard government debt as a problem; their actions indicate a desire for more.
Large corporations that rely on substantial government contracts similarly have vested interests in the accumulation of government debt. Their prosperity hinges on the expectation that this financial influx will continue unabated, like greedy consumers at a buffet.
The burgeoning education sector also thrives on a flawed debt-based model, actively recruiting impressionable 18-year-olds to take on extensive government-backed student loans. Current estimates indicate that federal student loan debt is nearing $1.4 trillion.
One must ask: what would happen to those high-salaried professors and lavish college campuses if this government-funded system were to collapse?
The automobile industry, too, is reliant on burdensome debt, with outstanding auto loan debts approximating $1.2 trillion.
A Fundamental Divergence
This illustrates the reality of our economic landscape in 2018. Following decades of escalating consumer, corporate, and government debt, our entire economy has been restructured to depend on it. Federal Reserve policies have only exacerbated this dependence.
We are undoubtedly on a trajectory toward disaster. Over the past decade, the nominal gross domestic product (GDP) has climbed from about $14.7 trillion to $19.3 trillion. In stark contrast, the national debt has surged at double that pace, ballooning from $10 trillion to $20 trillion.
This demonstrates a critical divergence between economic growth and governmental debt growth. The U.S. economy is expanding at approximately 2.5 percent annually, while government debt grows at a staggering 6 percent—or more.
Over time, this discrepancy results in two vastly different growth trajectories. Government debt has now eclipsed GDP. In the coming decade, projections indicate that this debt could spike by an additional $10 to $15 trillion, massively overshadowing any growth in GDP.
Eventually, we may find ourselves in a recession, with GDP declining while government debt accelerates, as Washington seeks to use borrowed funds to revitalize the economy.
This troubling divergence between GDP and governmental debt overlooks an even larger concern: the issue of unfunded liabilities.
Broken Promises
Each generation tends to cultivate the challenges that haunt the next. The actions of yesterday shape the present, while today’s choices will dictate tomorrow’s realities.
Right now, we’re confronted with several troubling legacies from our predecessors, notably outdated social safety nets established decades ago that are proving unsustainable. These programs are now under immense strain just as millions of Baby Boomers begin to rely on them.
The first beneficiaries of a Ponzi scheme often profit immensely. Consider Ida May Fuller, who received the inaugural Social Security check—Check No. 00-000-001—on January 31, 1940, for $22.54. Fuller had nearly recouped her entire payment of $24.75 with just that one check.
Yet, she continued to cash checks until her passing on January 27, 1975, ultimately receiving $22,888.92 back from an initial $24.75. It’s no wonder this system is faltering.
Medicare, another prominent social safety net, is similarly built on the flawed premise of people withdrawing more than they contribute. Like Social Security, Medicare faces a funding gap that appears impossible to bridge. Individuals who have invested in these systems throughout their careers face certain disappointment.
The recently released 2017 Financial Report of the United States Government, highlighted by Simon Black, reveals that the “total present value of future expenditures exceeding future revenue” for Social Security and Medicare adds up to a staggering shortfall of $49 trillion. How will taxpayers manage to cover this enormous gap, which compounds the already soaring national debt?
We find ourselves in quite the conundrum. There are no easy solutions. However, there are several less-than-ideal options:
Uncle Sam could significantly reduce or eliminate commitments to Social Security and Medicare recipients, leaving them abandoned. He might burden younger generations with escalating taxes, detracting from economic productivity and condemning us to a prolonged era of sluggish growth. Alternatively, Uncle Sam could irresponsibly devalue the currency, resulting in rampant inflation and potentially transforming the United States into something akin to a banana republic—if it isn’t one already.
It’s likely that Uncle Sam will pursue all three avenues, guided by political convenience. Expect this intergenerational conflict to intensify during the next economic downturn, anticipated within the next 18 months.
Sincerely,
MN Gordon
for Economic Prism
