President Obama's Plan: Taxes, Spending And Debt

The National Debt Continues To Soar...

National Debt from 1940 to 2011...

Are we headed in the right direction?

Our Debt Ceiling Limit Has Doubled in The Past 7 Years...

After increasing the nation's debt ceiling limit to $15.2 trillion per the legislation signed by President Obama on 08/02/11, we have more than doubled our debt ceiling limit in less than 7 years.

The debt ceiling was $7.4 trillion as of 10/31/04.

Source: Treasury Department

Total Government Debt Now Greater Than GDP...

• The 15-year average debt level is 65% of GDP.
  
  
• Economic growth begins to slow at debt levels of about 90% of GDP.
  
  
• Currently, total government debt is at 110% of GDP.
  
  
• This does not bode well for the future of America.
  
  
  

Greece. The Lowest "Rated" Sovereign Debt Nation In The World....

Greece is now the lowest rated country in the S&P debt rating universe, below that of Jamaica, Pakistan and Ghana and below Argentina and Ecuador, which have recently defaulted on their debt.

S&P doesn't rate every country, so some likely have worse credit profiles than Greece.

American Incomes Not Keeping Pace with The Cost of Living

No matter which inflation metric is used, the average worker's income is not keeping up with the cost of living.

Census Bureau data shows the median or typical household has experienced an inflation adjusted decline of -5% in household income since 1999.

During the 1960's and the first half of the 1970's, 77% of consumption in the U.S. was financed by wage and salary income, according to the Commerce Department. Since then, it has drifted down to just 64% in 2010.

Household debt as a percent of GDP soared from 44% in 1982 to 98% in 2007.

The increase in consumption was also funded by a significant increase in government-backed income transfers (unemployment benefits, social security, disability insurance, Medicare, Medicaid, veteran's benefits, etc) from just 8% in 1970 to almost 18% in 2010.

If it wasn't for the almost $1 trillion in government income transfers made possible by increasing federal debt by +$1 trillion since December 2007, disposable income would be -4.6% lower, rather than up +4.0%!

Source: Anchor Capital

The National Debt and Diminishing Returns...

The blue line in the chart represents the Total DEBT to GDP.

The green line represents the 10-Year % Change in GDP.

Note that since the 1980s, as debt has soared, GDP growth has suffered.

In the 1950s it took $1.36 in debt to produce $1.00 in GDP.

By the 2000s, it took $5.76 in debt to generate $1.00 in GDP.

Bottom Line:

The more debt we pile on, the more debt it takes to produce increases in GDP.

This immutable relationship between soaring debt and stagnant economic growth is the primary reason why...

 "You can't borrow your way to prosperity."

Brace Yourselves for A National Debt Tsunami...

• Our present national debt is $14 trillion.
  
  
• The Congressional Budget Office says we will be $20 trillion in debt by 2015, $25 trillion in debt by 2020 and $27 trillion in debt by 2021.
  
  
• The interest on $27 trillion would consume 50% of all federal tax revenue.
  
  
• By 2026, the rest of the world COMBINED will NOT have enough money available to buy ALL of our debt.
  
  
  

Why Market Risk May Be Higher Than You Think: Reason #4 of 5...

4. People still owe way too much money.

Households, corporations, states, local governments and, of course, Uncle Sam. It's the debt, stupid.

According to the Federal Reserve, total U.S. debt—even excluding the financial sector—is basically twice what it was 10 years ago: $35 trillion compared to $18 trillion.

Households have barely made a dent in their debt burden; it's fallen a mere -3% from last year's all-time peak, leaving it 2 times the level of a decade ago.

Quote of The Day: John Adams on The National Debt...

"There are two ways to conquer and enslave a nation. One is by the sword. The other is by debt."

-John Adams, US President

 

An Intractable Fiscal Problem - by David Rosenberg (The Massive, Snowballing Debt Bulge)

An Intractable Fiscal Problem

by David Rosenberg

Even with low interest rates, the massive debt bulge has become so large that interest charges on the public debt are within 3 years of absorbing over 30% of the revenue base, which then makes it that much tougher to reverse course. 

In other words, the fiscal problem is becoming increasingly structural and we are already at the stage where even if the economy were running flat out at full employment, the deficit would still be over 7% relative to GDP. At some point, this will begin to impede economic progress.

When you add up the entitlement programs, you know — the ones you can’t cut back on, and interest payments on the grotesque debt load, we have 65% of total government spending that can’t be touched. 

In the next decade, under status quo policies, this “mandatory” share of the spending pie goes to 72%. Tack on the defense budget, my friends, and we are up to 88% of federal government outlays that are next to impossible to reverse. 

So tell me — we are going to reverse this seemingly intractable run up in the public debt to GDP ratio by slicing 12% of the spending pie that is discretionary? It won’t be enough, even if all that 12% remainder ‘pork and barrel’ spending were eliminated altogether.

So guess what the future holds … higher taxes: very likely a national sales tax. It works in Europe. It has also worked in Canada. Japan is planning to double its national sales tax from 5% to deal with its fiscal challenge. 

It stands to reason that a federal consumption tax will have to be part and parcel of any U.S. strategy to solve what is increasingly becoming an intractable budgetary deficit.

Indeed, while many a Keynesian will point to the need for a government-led demand boost, the problem is that when the deficits and debts become structural, what is known as the “Ricardian Equivalence” sets in and this means that the fiscal stimulus does more harm than good for the economy.

Unfortunately, while the bailouts saved insolvent banks (oh, we’re not Japan at all) the stimulus from this Administration involved a series of short-term quick fixes that provided no long-term multiplier impact. At least FDR put people to work — not merely to pay them to be idle. At least Eisenhower built highways -- with a long-run payback.

Read the entire article here...

An Intractable Fiscal Problem - by David Rosenberg

U.S. Government Debt Nears Overwhelming Threshold

In the book, This Time is Different, writers Ken Rogoff and Carmen Reinhart documented that governments debt begins to erase long-term growth once it goes beyond 90% of Gross Domestic Product (GDP).

Their research shows that the average growth performance of developed economies drops by around -1.75% per year when debt breaches that threshold.

As you can see in the chart below, overall U.S. government debt now stands at 93% of projected 2010 GDP.

And that doesn’t even take into account the massive guarantees by government-owned Fannie Mae and Freddie Mac.

The International Monetary Fund (IMF) projects the ratio of debt to GDP to surpass 100% by 2014.

This does not bode well for prosperity in America.

National Debt Is Soaring Relative to GDP

Is The Economic Foundation Of The U.S. Crumbling?

U.S. National debt as a percentage of GDP has been climbing steadily since 2000, and has seen exponential growth in the last two years.  At the current ratio of 83.5% debt to GDP, we are at a level not seen since the 1950s. This metric is presented in the chart below going back 90 years. 

By the end of 2010, this ratio is projected to be near 100% of GDP absent a dramatic shift in domestic budgetary policy.

As with any borrowing, the more a person, entity or company borrows, even the United States of America, the higher their cost of borrowing will go, all else being equal.  

Interestingly, the national debt of $12.17 trillion, actually excludes Fannie Mae and Freddie Mac debt. The U.S. government became the effective conservator of both of these entities with the Housing and Economic Recovery Act of 2008.  

The estimated combined on and off balance sheet debt of Fannie and Freddie is purported to be just over $5 trillion. 

Including this additional $5 trillion in debt, U.S. Government debt as a percentage of GDP is actually more than 120%. 

On that basis, U.S. government debt as a percentage of GDP is the highest ratio it has ever been, or at least since the numbers have been recorded, which is since 1792. Needless to say, both ever, and since 1792, are a long time.

Globally, this data hasn't been updated since 2008, but based on 2008 data, the U.S. has the 5th highest indebtedness as a percentage of GDP, just barely above Singapore and just below Jamaica, man.  The only other countries more indebted than the U.S., on this basis, are the economic stalwarts of Zimbabwe, Japan, and Lebanon. . .

Keep your eyes on U.S. government debt . . . this Queen Mary is not turning any time soon and will hold investment implications related to many asset classes for years to come. 

We cannot increase our debt exponentially without increasing our borrowing costs.