How OUR Debt Crisis Will Impact YOUR Wallet
- Feb 17, 2010
- admin
- Investing
IT HAS BEEN SAID THAT NO DEMOCRACY CAN SUCCEED OVER THE LONG-TERM.
Why? Because people have the power to vote themselves benefits.
Ironically, the first democracy to learn this lesson over 2,000 years ago was Athens, Greece. They hold the distinction of being the first country in recorded history to introduce a democracy. Unfortunately, however, they also hold the distinction of being the first country in recorded history to put an end to the democratic experiment as fast as they could.
The Greeks of today would serve themselves well by taking a refresher course on their own history. Like the Athenians of antiquity, the Athenians of today have voted themselves benefits that have turned what we consider privileges into rights: A well paying government job is viewed as a right of every citizen instead of a privilege….A generous pension plan is viewed as a right of every citizen instead of a privilege….And free health insurance is viewed as a right of every citizen instead of a privilege. The list goes on and on and on.
Unfortunately for Greece, the lenders who were so generously shoveling money at them were no longer willing to finance their annual budget deficits. What the lenders realized was that loaning money to Greece was becoming incredibly risky. The reason was simple really: Greece’s debt is bigger then its entire economic output for a full year. And because of that added risk, Greece was going to have to pay their lenders a lot more to borrow money. Money that it simply can’t afford to pay.
To add insult to injury, the only way Greece’s lenders would even loan them money at the newer, higher rates was if Greece cut its spending dramatically. A country that is forced to cut its spending by 10% or more is a country whose citizens are going to feel a lot of pain as economic “rights” convert back into “privileges.” Citizens will be hit with the double whammy of higher unemployment – as high as 20% – and much lower benefits. And just like that the music stops.
But the pain Greece feels in the short-term will likely pale in comparison to the pain she’ll feel in the long-term. Greece’s current problems will retard its ability to invest in its future. So as painful as today will be one thing is certain: the next generation will have it worse, as the country is forced to cut spending on education, infrastructure, defense, etc.
We’re A Lot Closer To Greece then You May Think
Before I continue, let me begin by stating that I’m far from an alarmist by nature and I’m not one to easily believe the sky is falling. Let me also point out that there are major structural differences between our economy and Greece’s. The biggest difference being that it’s easy for capital to match itself to opportunity in our incredibly dynamic economy. And what a difference it is: the last time Americans were filled with such pessimism about our economic future, capital was quietly at work matching itself with a little opportunity called the internet. The result? The 1990’s will forever be referred to as the Roaring 90’s, as the American engine called dynamism turned out the biggest economic expansion in American history.
There are, however, several very disturbing similarities: like Greece, our debt is about to skyrocket, with some estimates reaching as high as 100 percent of our total annual economic output within ten years. Imagine, for a moment, what life would be like living in an America where our debt is as large as our GDP. Using today’s economy that would mean that we would have somewhere in the neighborhood of $14 trillion in national debt.
Now let us assume annual interest costs of roughly 5 percent. That would mean that our annual interest payments alone would be roughly $700 billion dollars. Of the $3.5 trillion outlined as President Obama’s 2011 budget, roughly $2.12 trillion is allocated toward mandatory programs such as Social Security, Medicare and Medicaid. In other words, this is money that we are not able to easily touch thankfully.
The remaining roughly $1.2 trillion is allocated for discretionary spending, money that gets decided on by Congress and the President each and every year. $782 billion of that amount is allocated toward defense spending while the remainder, $432 billion, is allocated toward every other department of government such as education.
In the dismal future we’re looking at, $700 billion dollars of the $1.2 trillion in discretionary spending would be used to pay interest on our debt. The remaining $500 billion would be left over for everything else, including departments such as defense, education, commerce, energy, justice, labor, etc. Given our current ratio of defense spending to discretionary spending, it is likely that of the $500 billion, $300 billion would be spent to defend ourselves while the remaining $200 billion would be spent on everything else. $200 billion doesn’t buy much infrastructure and education investment in our future in a country with 300 million citizens and a $14 trillion economy.
Something has to give. And the first “something” is going to be taxes. Since the budget calls for money spent to be greater then money that the government takes in, we’re going to have to borrow $1.4 trillion just to pay our bills. And that seems to be the norm for the forseeable future.
What does that mean to you?
It means that taxes are about to skyrocket as we struggle to pay for our past excesses and drift towards converting privileges like health insurance into very expensive “rights” of citizenship. Just based on our current finances, taxes would have to rise by roughly 75 percent just to pay for our bills this year.
Can you imagine what kind of havoc a 75 percent increase in your tax bill will play with your spending money? Can you imagine what kind of havoc a 75 percent increase in taxes will play with the job market? Economic growth will slow to a crawl as people have less money to spend and companies have less money to hire people with.
These are the reasons the value of the dollar has been in a long-term decline.
One Foot in the Grave, The Other On a Banana Peel
But by far the worst thing we have in common with Greece is the fact that, like Greece, our next generation will live in a less prosperous country by far to the one we were handed.
This was made as clear as day to me this weekend when a dear friend of mine, his lovely wife and his three beautiful children visited with us during their long-scheduled vacation from New York to Florida. Not only does my friend share my passion for classical history, economics and good conversation but he also happens to have the coolest job in the world – he’s an 8th grade science teacher in upstate New York!
Or I should say he “was” an 8th grade science teacher in New York…
For it was this weekend that I learned that the public school he works for closed their science department due to a lack of funds!
Having grown up in New York, I’ve long been familiar with school budget cuts that close the drama department or after-school activities. But for the life of me I have never in my entire life heard of a school cutting its science department!
Have you? Can you imagine the future in store for our children if they aren’t taught the mission-critical skills you learn when you study science? When I hear news like that it’s hard to visualize a future that isn’t bleak.
I’d really like to hear your thoughts on what I consider to be an educational 9/11.
I only ask that you keep partisan politics out of this debate as pointing fingers at this point would be as absurd as pointing fingers at the captain of the Titanic. Now is the time for Americans to comment and share their thoughts, not Republicans or Democrats.
Dylan Jovine