The national debt currently stand at $12.6 trillion dollars and the debt ceiling
has now been raised to $14.3 trillion.
Were interest rates at historical averages of 5-6%
the interest on that debt would be between $600-700 billion annually.
We would be forced to spend as much on debt maintenance annually as we do on national
I want to be sure you understand that. Just the annual interest on our existing debt would equal or
exceed what we spend on national defense. How long will it be before we can no longer affort to defend ourselves
Knowing the interest rates cannot be kept this low forever and the
debt will continue to rise we can reasonably expect our annual debt maintenance
to exceed $1 trillion dollars annually in the next decade.
Our ability to fund basic government service may soon be in jeopardy. Don't take my word for it, the
Obama administration's budget projections have the national debt reaching $20 trillion before
the decade ends if all goes well.
Let me try and put this in perspective. Let's use the example of a somewhat typical upper middle class homeowner.
Back in 2007 this family owned assets worth $500,000. This included their home, cars, furniture, savings, all of it.
They had an income of $100,000 a year and total debt of $200,000 at an average interest rate of 5%. This works out to
a nice round $10,000 per year in interest on their debt.
Fast forward to 2010. Over those three years the value of their assets has fallen to $400,000 and their total debt
has risen to $300,000. The additional debt was caused by increased spending on their home, vacations and a new car.
They have now maxed out their home equity line and can no longer borrow more money to pay for things. Also, due
to the bad economy they have had to take a lesser job and now only earn $80,000 per year. The good news though is
that interest rates have fallen so the interest on their larger debt is still only $10,000 per year.
So what should a family in this situation do? Knowing that interest rates can only rise and that their income
is only going to grow slowly if at all. Logic says they would need to cut expenses enough that they no longer
need to borrow money to pay their monthly expenses. At the very least they would need to cut out the expensive
vacations and not but any new cars. Common sense tells us what needs to be done to avoid bankrupcy or losing their house
Unfortunately the federal government does not believe the rules of common sense apply to them. They believe the
best way to fix the problem is to spend and borrow money faster than they ever have before. They believe that if
they spend enough money the economy will grow again and once that happens more taxes will be collected. They
believe their is a multiplier effect of government spending. That for each dollar spent that the economy grows
by more than one dollar. History has shown this is not the case especially when the government's need to
borrow crowds out the private sector's ability to borrow money to grow their businesses.
If you look at this chart you'll see the tremendous spike in the 1940's due to World War 2.
The government spent huge amounts of money building planes and tanks, developing the atomic bomb and funding the war overseas.
What you should also take note of is that for the first time since then our debt is approaching 100% of GDP.
So what does that mean? If we fixed it once we can fix it again, right? Maybe not.
Something has changed drastically since then that will make our ability to grow out of this debt crisis
much harder. In the 1940s the economy of the country was close to 70% manufacturing and 30% consumer spending.
We built things and sold them to the entire world. We didn't reduce the debt to GDP ratio by paying off the debt,
we did it by massively growing GDP. Nuclear energy took off, auto manufacturing took off followed by electronics,
and other high tech products.
When you think about what has happened since then though you begin to understand why this time it will be different.
America has become a mass importer of the things we used to make. Try to buy something today that is not made in China,
Mexico,Indonesia or Japan. Our economy has been growing based upon our ability to spend the money we made on the value
of our homes increasing. We have been taking that money and sending it overseas for cheap Chinese stuff and foreign oil.
To put it simply we have very little means to grow GDP and we have created massive government entitlements that will only continue
CBO report: Debt will rise to 90% of GDP
The CBO projects that under President Obama's proposed budget, the U.S. publicly held debt would grow from $7.5 trillion - or 53 percent of the nation's Gross Domestic Product (GDP) - at the end of 2009 to $20.3 trillion - or 90 percent of the GDP -- by the end of 2020. The interest on the debt alone, says CBO, would more than quadruple, reaching $900 billion annually by 2020.
Stop and read these statements 3 or 4 times.
If every single dollar you earned went to pay the interest on your debt you would not survive very long.
Budget Deficit >>