More Than A Debt Problem

I want to thank my Dad for stirring this conversation and showing me some great resources.  Thanks Dad!

We have a debt problem in the United States.  It starts at the Federal level and filters down into most of our households.  Most accept that it is the way it must be.  We are a consumer nation and the best way to grow is to borrow so we can consume more.  However, this can’t be sustainable because eventually our debt payments will outweigh our ability to consume more.  Growth must halt while the piper is paid his dues.  Then when the interest payments are down spending on growth can resume.  This cycle is normal and livable.  Where our real debt problems come from is we’ve learned to ignore this stopping point and keep borrowing straight through it.  We’ve passed all the risk up the government chain.  We demand that our politicians will fix any mess we let ourselves into.  Medical health care, retirement plans, fixing bridges – on all of these issues we’ve convinced ourselves that we are no longer capable of planning for our own futures so we need to add an inefficient administrative entity to manage it for us.  However without the need to look out for our own how will we maintain productive and creative enough to continue to pour money into these super funds?  I won’t be able to muster much give a damn when my whole future is set up.

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National Debt Problems

For much of this conversation I’m going to refer to number that come from http://usdebtclock.org/  spend a few minutes looking at this single page website.

The national debt is quickly approaching 12 trillion dollars with a budget deficit this year of almost 1.3 trillion dollars.  These numbers have been tossed around a lot lately and I worry they are starting to lose meaning.  This 12 trillion is about $39,000 for each man, woman and child.  Every single one.  Good thing we want to give every child $500 when their born because that will really help offset their $39k they owe.  Oh wait, since we have a budget deficit now that $500 would be borrowed so you’ll really owe that too.

What you need to take interest in right now is interest.  Currently we pay $313 billion per year on national debt interest.  That’s about 2.6% of our national debt.  How long has anyone loaned you money at only 2.6% interest?  Let’s just say over the next 10 years we maintain our current deficit and the interest rate only doubles to 5.2%.  I think we’d be lucky to only have this scenario, but let’s play along.  That puts our national debt at $25 trillion with an annual interest rate payment of $1.3 trillion.  Three times the current interest payment.  If things get really out of control due to monetizing debt and falling national credit ratings and interest rates hit 10% we could be facing a $2.5 trillion interest only payment.

However, this scenario is rosy because we haven’t talked about social security or Medicare yet.  Over the next 20 years baby boomers will be utilizing these resources more heavily.  The bad part of the system is as soon as the biggest users start using, they also stop paying.  The liability on these entitlements is going to explode.  The answer we hear is job growth is going to get us out of the problem. 

Currently we are around 10% unemployment.  If all of these people got their jobs back the income tax at best would grow $7.5 billion.  Probably less because the average unemployed worker is likely lower paid then the national average.  Though I don’t have the facts to absolutely back that statement up.  The payroll tax would increase by about $7.3 billion.  If over the next 10 years corporate profits double because everything is working so well then the corporate tax increase would be about $244 billion.  Add these up for an increase of about $260 billion dollars or 1/4th the current budget deficit.  Yup, we’re still falling further behind.  We’re just not going to grow our way out of this debt problem.

Consumer Debt Problem

We can’t ask our politicians to change anything we’re not willing to do ourselves.  At the core they are a reflection of the vocal population.  Until we get our households fiscally responsible we won’t have the courage to tell our politicians to.  We will not care what the federal government does as long as they save us from our selves.  Unfortunately we just read the numbers that show the Federal government will soon be unable to help anyone.  The average debt per citizen is around $54,000 (that’s right 3 year olds too) while the average savings is only around $2500.  Mortgage debt does appear to be dropping which is great (foreclosures are probably a healthy chunk of that), unfortunately credit card debt problems are one the rise.  We just can’t get ourselves to live on less than we earn.

If we want to solve debt problems we need to take the hard steps and change our lives.  Pay down debts, plan for our futures, turn off the TV to have the time to learn what we need to know.  Once we get a handle on our finances and our comfortable in our own ability to save for college, retirement, unexpected events, etc we’ll be able to tell Washington to cut the entitlements we don’t need them anymore.  We’ll also be able to say, “See – we don’t need debt and you don’t either!”  We again will be a super power in this world that will have the ability to help others, set an example, and raise the standard of living for all.  But, only if we change today.

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