Friday, October 3, 2014

My View

Random ruminations from your resident curmudgeon...

When we talk about the financial condition of our country, we often focus on our national debt. Currently, it is north of $17 trillion dollars. Our annual deficits- what we spend as a country compared to what we collect in tax revenues- is running roughly $1 trillion a year.

To finance this debt, the federal government sells Treasury bonds and bills to investors, which include individuals, institutions, and foreign buyers, notably foreign governments.

Last year, $7.5 trillion in Treasuries came due, meaning the federal government had to return the principal and the accrued interest to those investors. By comparison, $4.8 trillion in Treasuries came due in 2008.

The amount that matured in 2013 was the highest amount in the history of our nation.

Now one may ask why the rapid and significant increase in debt that is maturing, and the answer is that this is a strategic decision made by officials in the Treasury Department.

With the Federal Reserve forcing interest rates down to zero, it was decided by those officials that when longer term Treasury bonds that carry a higher interest rate matured, they could be replaced with shorter term bonds that carry a much lower interest rate.

And over the past few years, that strategy has worked well, ,saving the Federal government billions of dollars in interest payments.

But what happens if investors decide they no longer want to loan the U.S. government money at these incredibly low interest rates?

If the Federal government can no longer borrow at these ultra low interest rates, life in this country will change radically, and it will not be good.

As interest rates rise- and they will- more of our nation's annual budget will be used to make interest payments. And the question that worries everyone in Washington is can we afford to make those payments?

I would submit that we cannot.


Because we have created a dependency economy.

Consider that roughly 70% of our annual spending goes to some form of social spending such as welfare, WIC, EBT cards, Social Security, and other programs. Currently, 49% of households in America receive some form of government benefit. That is approximately 128 million people, according to a study by Patrick Tyrrell and William Beach. They found in their study that federal spending on social programs is growing 6 times faster than the rate of population growth in this country.

It would seem that the main function of our government today is to take money from one group of people and give it to another.

And it is going to get worse.

Consider the following:

  • As Baby Boomers continue to retire, the cost of social programs is going to increase exponentially.

  • There are currently 70 million people enrolled in Medicaid, the health program for those in poverty. The full impact of Obamacare will be to add another 16 million.

  • When Medicaid, the healthcare system for those over the age of 65, was first established, it was estimated that it would cost the government around $12 billion per year by 1990. We spent $100 billion on the program in 1990 and over $600 billion last year. Medicare currently has 51 million enrollees, and it is projected to increase to 70.2 million by 2035.

  • Based on the growth of the Medicare program and the average annual expenditure per participant, Medicare has an unfunded liability of $38 TRILLION dollars over the next 75 years.

  • In 1945, there were 42 workers for every beneficiary that was receiving Social Security. today, that number is 2.5. There are currently 63 million Americans receiving social Security benefits. That number is projected to grow to 91 million by 2035. Based on actuarial projections, Social Security is facing a shortfall of $134 TRILION dollars over the next 75 years.

  • Looking at all the social programs in place today and the promises our government has made to pay future beneficiaries, our unfunded liabilities are projected to be $222 TRILLION dollars.

When looking at our current and future obligations, one can see that if interest rates rise and we have to pay more to service our massive debt those social programs are going to get pinched. And that is going to strain the social fabric of our nation.

We know as taxpayers are going to be asked to pay even more to support the government's largesse if nothing changes.

And it is politically expedient not to change any of these programs.

Politicians in Washington have prostituted themselves by expanding these social programs in order to buy votes and remain in power. The lack of leadership by our elected leaders has set the stage for economic disaster.

It is past time that we demand that our elected leaders begin meaningful discussions on reforming our bloated entitlement system. Beyond that, we must demand that Washington stop impeding the creation of high quality jobs and create an environment where new companies can get started and existing ones do not face onerous burdens to expand.

This is the only real way to get out of this mess.

Otherwise, our country faces an economic disaster of epic proportions.

And that, my friends, is my view.

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