The 3/28/16 article inserted below [source: Forbes] is the most concise [while communicating the subject adequately] description I’ve seen of how we got into the fiscal mess we’re in, and why the current situation is unsustainable. The graph near the midpoint of the article is an excellent example of the old axiom “One picture is worth a thousand words” — one need not be an economist or a mathematician to look at a graph like that and understand that, whatever is being plotted on the vertical axis, the trend over time is unsustainable. The full article appears below, but the bottom line is that the current fiscal path is unsustainable — we will become like Greece [et al] if we don’t get our fiscal house in order [soon] . It’s not a matter of if — only of when.
The Full Article
U.S. Debt Is Heading Toward $20 Trillion: Where It’s Been, Where It’s Going And Why
The fact that the U.S. national debt has surpassed $19 trillion raises a number of important concerns. What are the consequences of amassing such a large public debt? How will it affect the future of our children and grandchildren? Will the government increase our tax burden? Is this just a house of cards waiting to collapse? These are only a few of the questions on the minds of Americans as we face the largest debt in our nation’s 240-year history.
In this article, we will look at the factors that opened Pandora’s Box and created the environment for Congress to overspend. As I write this, a couple of axioms come to mind. To paraphrase, “If we fail to learn from the past, we are destined to repeat our mistakes.” Also, “The longer one lives, the greater their perspective.” It is my sincere hope that these words will help broaden our perspective and, with a splash of history, shine a light on the road ahead before it is too late. Keep reading as we recap where we have been, look at where we are now, and discuss where we are heading.
It seems politicians like to make relatively simple issues appear complex. Why? Perhaps it is because they need us to need them. In truth, the real reason America is in such dire financial straits is not at all complicated. Between 1900 and 2015, the federal government’s budget had a deficit in 89 out of 116 years or 77% of the time. When you continually overspend, there is only one possible result: greater debt.
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Sometimes there are legitimate reasons for overspending. For example, during a severe economic crisis, government may need to step in and provide assistance to those adversely affected. In addition, during a time of war, whether officially declared or not, government may need to spend more than it collects in order to properly defend our way of life. These types of situations are temporary. Afterward, the government should reduce its spending to bring the budget under control. Unfortunately, once the government creates a new program, even if it is to meet a temporary need, it rarely eliminates it when the need no longer exists. Instead, politicians have mastered the art of using money to retain power. By expanding the number of individuals on welfare, they have created a burgeoning dependent class who rely on government subsidies to survive. This is a key reason there are fewer people willing to work hard to achieve the American Dream. But I digress.
What Opened Pandora’s Box?
The key factors that set America on its present course, which is toward an expanded-Socialistic government, are as follows:
- FDR’s New Deal of the 1930s
- L.B.J.’s War on Poverty of the 1960s
- Nixon’s removal of the gold standard in 1971
- A successful campaign to divide Americans into the “haves” and the “have-nots” (class warfare)
There are other reasons, but the result is a growing entitlement mentality. I detailed FDR’s New Deal in my previous article. The War on Poverty was an attempt by President Johnson and Congress to eradicate poverty through expansion of the welfare system. The role of welfare (in many cases) was to provide temporary assistance until the individual could get back on their feet. However today, it has become a way of life. For example, welfare payments increase when a recipient has another child. Should the government reward someone for having a baby? There is also corporate welfare. Why should we pay farmers not to grow a certain crop? Should the government be in the business of setting commodity prices? Again, these are foundational questions regarding the role of the government.
The action that opened Pandora’s Box for good was President Nixon’s final removal of the gold standard in 1971, dubbed, “the Nixon Shock.” Prior to this, one could redeem U.S. currency for gold. In 1966, the U.S. held about $13.2 billion in gold reserve. While this was sufficient to back the dollars held in America, it was not enough to cover the dollars held outside our borders. With the Vietnam War becoming more expensive, Nixon’s removal of the gold standard opened the door for Congressional overspending. The following chart illustrates this paradigm shift very well. It contains the fiscal-year budget surplus/deficit and the total national debt from 1901 to 2015 (black-dotted vertical line) with a projection through 2021.
The blue-dotted line marks the year the U.S. abandoned the gold standard for good. Even though there were deficits prior to this, they began to increase greatly after this event. With the exception of four years during President Clinton’s second term (with a newly elected Republican majority in Congress), there was a deficit every year since the removal of the gold standard. Below are the numbers and percentage of years that the federal budget had a deficit. For example, during the entire period, the federal budget had a deficit 77% of the time (89 out of 116 years).
• All Years: 1900 to 2015……….77% (89/116)
• Before 1971: 1900 to 1970……68% (48/71)
• After 1970: 1971 to 2015……….91% (41/45)
In place of a gold standard, we now have a debt ceiling, which is another name for “credit limit.” Imagine you were a banker in charge of all lending for your bank. If an entity applied to increase its credit limit, stating they would not be able to pay their bills without it, how would you respond? Would you continue to grant their request? This is precisely what is occurring today and has led to the largest government debt in human history!
Where Are We Heading?
This is one of the most important issues of the day. Everyone agrees that the debt will continue to rise. How will this affect us? If it gets too large, there would be a reluctance to purchase U.S. government debt (i.e. bonds). If the reluctance is significant, it would create fear in those holding U.S. government debt (i.e. fear of default). This would cause the value of U.S. debt (i.e. bond prices) to fall. Such an event would send shock waves throughout the global financial system. Of course, the more likely scenario is that the government will attempt to raise taxes to reduce the debt and attempt to instill fiscal order. To achieve this, Congress would need to raise revenue through tax hikes and cut spending. Increasing revenue would prove difficult because if you tax high-income individuals too much, they might relocate to a more tax-friendly country. Thus, the target would be on the backs of the middle class and the war would be fought in the court of public opinion. Unfortunately, too many are not thinking this issue through to its logical end.
Do not be deceived, the federal government will raise taxes on the middle-class because there is a limit on the amount you can tax wealthier individuals and the poor have very little to pay. A larger government leads to higher taxes (to support it), which leads to a shrinking middle class. The middle class is shrinking because of higher taxation and companies leaving America for Ireland, the United Kingdom, and other tax-friendly locales. Do not be fooled by politicians who say, “We must be willing to pay our fair share.” Remember, they are the ones defining “fair share,” not us.