Nothing stings like regret, and we’re about to get a heaping dose

Picture this. Let’s say you make a salary of eighty thousand dollars a year; your spouse has a part-time job that pays thirty-five thousand. You have a hefty mortgage, joint savings account of six thousand and no investments. This account and your house are your only assets.

You have a good job, with the possibility of moving up, but after decades of working hard, at age fifty-nine your most appealing employment option is retirement with a modest pension in six years.

You and your spouse have had occasional discussions about cranking up the amount you save each month from three hundred to twelve hundred dollars. But too many “necessities” right now are competing for that “extra” nine hundred dollars.

You “need” a new car. You both “need” a vacation, new clothes, a new sundeck.  You decide to finance your many “needs” through debt.  Over the next year, you take out a twenty-thousand-dollar home equity loan, and chalk up twenty-five thousand dollars’ worth of credit-card debt.  As for paying them back so you can retire in six short years? Like Scarlett O’Hara, you’ll think about that tomorrow.

Debt, Investment Opportunity, Credit Card

What if the U.S. government decided to handle its financial affairs with a similar strategy? According to financial analyst, Paolo Mauro, in a U.S. News & World Report article, that’s exactly what it’s doing – borrowing from the future to meet the ostensible “needs” of the present. “…the Great Recession has left long-lasting scars, including higher government debt ratios and, crucially, diminished prospects for economic growth during the next decade. The combination of high debt, mounting spending pressures from population aging, and moderate growth pose the risk of fiscal/financial crisis – a low probability event but one with potentially enormous costs for the U.S. and global economies….

“Living with high debt is living dangerously. When government debt is large, a rise in interest rates causes total borrowing costs and thus the deficit to increase substantially. As larger deficits are financed, the debt also swells.” Mauro claims general government gross debt amounts to a hundred and eight percent of gross domestic product (GDP), the third largest among the G7 countries. What’s especially disturbing, though, is the Congressional Budget Office (CBO) calculates our GDP will increase at an annual average rate of 2.1% from 2016 to 2026. But in 2007, the CBO growth projection for 2008 to 2018 was 2.8%.

Mauro’s argument ultimately reverts back to a very basic principle. Yes, it’s crucial for a nation to manage its public debt. But for a nation to manage its debt ultimately means its economy has to grow. When growth declines, revenues also decline, and governments then hesitate to respond with cuts in spending, at which point more debt accumulates.

Furthermore, when government debt swells, increased interest rates cause borrowing costs and, therefore, the deficit to increase commensurately. Then when deficits are financed, debt continues to swell, whereupon investors, concerned about a debt default or greater inflation, will push for even higher interest rates.

As Mauro warns us, “Living with high debt is living dangerously.” He also emphasizes government stimulus (aka “quantitative easing”) won’t work. Whether you’re talking about the finances of our hypothetical couple, or the U.S. economy, debt management alone is not enough. Both require a healthy spurt of economic growth.

In other words, we’re borrowing from the future, and that of our kids and grandkids, to live high in the present. And as long as we’re cavalier about our national debt, and show no concern about default, you could even argue we’re stealing, rather than borrowing, from our own future.

You don’t need more stuff; you need to think about what you’ll really need ten years from now, or twenty, and then you need to have a hard talk with yourself about how you will accumulate that needed wealth – and protect it from inflation and market downturns.

That’s why we’re seeing a sharp uptick in gold buys; it can buttress your investments and guard your wealth from markets, inflation and a fragile dollar. The renowned hard asset also offers plenty of room for an increase in value to balance declining yields in your bonds and shrinking dividends in your stocks. But don’t wait till tomorrow to think about it.