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The big picture of why the US government is going bankrupt

Posted by John T. Reed on

Once upon a time, everyone was admonished to put money away for a rainy day. Sound advice consistent with an ancient concept called self-reliance.
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Now every time the slightest thing happens, we run to the federal government looking for welfare. The problem is the federal government does not have money lying around to spend on every adverse event that occurs in American lives. They borrow this money to play this game and now have accumulated $23T in national debt.
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That is 107.3% of the GDP. For perspective, it was 17% in 1933 when FDR was inaugurated. That is how the government was able to get away with the New Deal spending. That is why US bonds and the US dollar were the great safe haven then. But people act like we still have that New Deal government available.
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We do not. When Ronald Reagan was inaugurated in 1981, the debt-to-GDP ratio was 33%. Reagan made DC safe for deficit spending by spending enormous amounts on defense on a Dem promise of domestic cuts. The cuts never came.
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If you have a debt-to-GDP ratio over 60%, you are not allowed to join the EU. At the end of WW II and the Korean War, the debt-to-GDP ratio hit a record of 122%, but it was not as bad as it sounds because we knew we were going to fire ten million active-duty and millions more defense workers because of the end of the war. And we DID fire all those guys.
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Now, with a 107.3% debt-to-GDP ratio we are approaching the war-time record, but without a war. It used to be hyperinflation only resulted from high war-time spending. But now, we have politicians gone wild with throwing taxpayers’ money at everythings that will buy some votes. As Margaret Thatcher famously said, "The trouble with Socialism is that eventually you run out of other people's money."
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The US government has already seen its AAA bond rating fall to AA with S&P. The other rating agencies kept it at AAA because they lie. S&P was severely punished for lowering it to AA. Here are the current ratings:
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Agency Rating Outlook
Fitch AAA Negative
DBRS AAA Stable
S&P AA+ Negative
Moody's Aaa Negative
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In 1933, they would have been all AAA and positive.
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There are three places to get the money for deficit spending: increased taxes, increased borrowing, and “printing” money. Tax increases are probably at the limit and certainly cannot be doubled.
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Our annual tax revenues now are $3.5T. Our unfunded liabilities for social security, existing Medicare, Medicaid, federal pensions, unemployment, and more too numerous to list is around $100T. In other words, if the US government were a private corporation, it would be under legal attack from the federal government for failing to have that $100T in the bank. As is often the case, the federal government is exempt from funding its unfunded liabilities for pensions and medical care.
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Here is a common trick for making these huge numbers more understandable. Let’s remove eight zeros from these figures to make them look like a person:
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annual income $34,000
debt $235,000
unfunded liabilities (money we have not yet borrowed but that we will have to borrow in the future) $1,000,000
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This is the picture of a person who has borrowed $235,000 when the max home mortgage he could afford in about $90,000. Furthermore, he has obligated himself to pay an additional million bucks. He is borrowing to make his debt payments. Private lenders would have cut up his credit cards long before this point. Governments need to live within their means just like individuals. Not happening.
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Are you the guy making $35,000 in this example? No. You are the guy planning to live off the $1,000,000 he promised to pay you. In other words, you are eligible to join the Future Bankrupt Persons of America Club at your high school. I am the guy trying to tell you to become self-reliant so you are not devastated by trusting this deadbeat known as the US government.
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But the federal government is not exempt from the laws of economics. The tipping point may come from a shock like the coronavirus. It may come from a war. It may come from just continued adding straws onto the back of the US fiscal camel. The issue boils down to when do the American people and the people of the world stop trusting that the purchasing power of the US dollar. As the first sentence of my book on the subject say, “It could happen tomorrow.”
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