The US’ debt $100 trilliion of unfunded liabilities

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The US’ debt $100 trilliion of unfunded liabilities
Photo by Rilsonav (Pixabay)

No matter who won the presidency, the economic way forward was not going to be easy. The Republican team understands they must “stand and deliver.” But as we will see, that is not going to be easy.

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I’m going to depart from the normal format, where I talk about the economic realities we face and how we should invest, and instead offer my view of what I think the Trump administration and the GOP-led Congress should do.

But first, let’s look briefly at where we are now—at the constraining facts that any economic proposal must take into consideration.

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The US’ debt spree

Total US debt, including private and business debt, is $67 trillion, or just under 400% of GDP. We have 95 million people not in the labor force. 15 million of them are not employed. That’s twice the number officially unemployed.

We have almost 2 million prison inmates, 43 million living in poverty, 43 million receiving food stamps, 57 million Medicare enrollees, and 73 million Medicaid recipients—and 31 million still remain without health insurance..

The US federal government debt will be slightly north of $20 trillion before Obama leaves office in January. Local and state debt is another $3 trillion. That is a total of more than $23 trillion of government debt. The US economy will be a few hundred billion dollars under $19 trillion at the end of this year. That is a debt-to-GDP ratio of somewhat over 121%.

That debt has risen roughly $10 trillion under Obama, in just eight years. Last year, the debt rose $1.4 trillion, even though we were told that the budget deficit was less than $600 billion.

This US debt total does not even take into account the over $100 trilliion of unfunded liabilities at local, state, and federal levels. These are going to have to be paid for at some point.

A drag on our growth

I bring up the size of the debt because unproductive debt is a limiting factor on growth. 10 years ago, it wasn’t that big of a deal. Today, it is. The more we increase our debt, the more difficult it is going to be to grow our way out of our problem with the debt.

That’s just an empirical fact.

Both Europe and Japan have much larger debt ratios than we do, and both have much slower growth rates. Note also that the velocity of money in both those regions is much lower than ours, and the velocity of money in every developing portion of the world continues to drop. (More about that below.)

Something like $5.5 trillion is “intergovernmental debt.” The theoretical Social Security trust fund is an example. We “owe it to ourselves,” and so many economists simply deduct that money when they talk about the size of the total debt. And technically, it is true that we pay interest on that debt, which comes back to the government. But that doesn’t mean those debts aren’t going have to be paid.

For economists to talk about this portion of the debt as irrelevant is economic malpractice. It is smoke and mirrors economics of the worst kind. But even if we did dismiss $5.5 trillion dollars of internal debt, the government’s debt-to-GDP ratio would still be almost 100% when you include state and local debt.

And that is definitely in the range where all the data and economic analysis suggests that debt is a detriment and a drag on growth.

“Deficits don’t matter”

Vice President Dick Cheney once remarked that “Deficits don’t matter” as he defended his spending on the Iraq and Afghanistan wars.

And when he said it, he was more or less correct. Then, the deficit as a percentage of GDP was less than nominal GDP growth, which meant that the country was growing faster than the debt was. (Later, it turned out that deficits did matter when the spending on everything else plus defense spun out of control.)

And for those people who say that tax cuts create growth, I would suggest that 2% growth for 16 years is not exactly what we were expecting. And much of the growth we did get during the housing bubble years was clearly spurious.

Yes, the US economy has grown at something like an average 2% for the last 16 years. Inflation was higher in the early years, but now it is about 1.5%, which gives us nominal GDP growth of about 3.5%. Total debt this year rose by 6.8%, or almost double our growth rate. Not the right direction.

After eight years of the slowest economic recovery in history, we are growing our debt dramatically faster than we are growing our country—even when we include inflation.

What should Trump do?

Republicans want to cut corporate and individual taxes to help stimulate growth. That is a necessary but not sufficient condition to stimulate growth. Significant regulatory rollback will help. It is also necessary but not sufficient.

Fixing the Affordable Care Act and bringing costs and benefits into alignment is another necessary but not sufficient condition for growth.

So here’s what I see as the only way forward if we want to dodge a deep recession and/or a greater crisis in the future.

  1. Cut the corporate tax rate to 15% on all income over $100,000. No deductions for anything. Period. A 10% tax rate on all net foreign income (with allowances for taxes paid against total income.) That will make us the most tax-friendly business nation in the world. International companies will not only move their headquarters here, they will bring their manufacturing and jobs with them.
  2. Cut the individual tax rate to 20% for all income over $100,000. No deductions for anything. Period. No mortgage deduction, no charitable deductions. No nothing. Anybody who makes less than $100,000 will not pay income taxes and will not file. This will dramatically promote entrepreneurial activity and help small businesses.
  3. We must make a serious effort to have a balanced budget and to fund healthcare and Social Security. That requires money. I would propose some form of a value-added tax (VAT) that would specifically pay for Social Security and healthcare.
  4. Policy wonks are going to note that you would not need a 15% VAT just for healthcare. I would propose that we eliminate Social Security funding from both the individual and business side of the equation and take those costs from the VAT.

This would be a huge stimulus to the economy. Plus, VAT taxes can be deducted by businesses at the border when they export products. This would make us competitive with every other country in the world whose companies also deduct VATs at the border.

  1. We need to jumpstart the economy. So I do think we need infrastructure spending, but I would do it a little bit differently. I would create an Infrastructure Commission that would authorize federally guaranteed bonds for cities, counties, and states. Read more here.
  2. Roll back as many rules and regulations as possible. I would instruct every cabinet member to find—every year four years—5% of the rules and regulations within their purview and eliminate them. If they want to write a new rule, they have to find an old one to eliminate.
  3. Trump will have two immediate appointments to the Board of Governors of the Federal Reserve. He will have another two in another year, giving him four out of the seven governors. I would also imagine that, given the ambitions of some of the other current governors, they will opt for the much higher income available in private practice. Having a Federal Reserve that is more neutral in its policy making and that realizes that the role of the Fed should be to provide liquidity in times of major crisis and not to fine tune the economy, will do much to balance out the future.
  4. Getting trade right will be tricky. It is one thing to talk about unfair trade agreements—and we have certainly signed a few. But we also need to recognize that some 11.5 million jobs in the US are dependent upon exports (about 40% of which are services). Frankly, if we drop our corporate tax to 15% and work on reducing the regulatory burden, I think we will be pleasantly surprised by how many jobs are created just by those steps alone.
  5. As I look around the world I see other countries experiencing or getting ready to experience economic stress that is going to force them to allow their currencies to weaken against the dollar. The euro is already down by over 30%. The potential crisis in Italy could easily push the euro below parity. I can imagine a time when we will see some strange new policies being suggested because of the competitive pressures exerted by a strengthening dollar.

Final thoughts

Let me be very clear. If we don’t get the debt and deficit under control—and by that I mean that at a minimum we bring the annual increase in the national debt to below the level of nominal GDP growth—we will simply postpone an inevitable crisis. We have $100 trillion of unfunded liabilities that are going to come due in the next few decades. We have to get the entitlement problem figured out. And we must do it without blowing out the debt.

If we don’t, we will have a financial crisis that will rival the Great Depression. Not this year or next year, and probably not in Trump’s first term… but within 10 years? Very possibly, if we stay on our present trajectory.

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3 COMMENTS

  1. Nicely stated…regardless what the nitpickers on this thread state. Unfortunately, I see none of this happening…well with the exception of the financial crisis. One need only look to our predecessors to get a glimpse into our future:

    “There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.” Ludwig Von Mises

    “The imperviousness of economic law to political law is shown in this historic fact: in the long run every State collapses, frequently disappears altogether and becomes an archeological curio. Every collapse of which we have sufficient evidence was preceded by the same course of events. The State, in its insatiable lust for power, increasingly intensified its encroachments on the economy of the nation, causing a consequent decline of interest in production, until at long last the subsistence level was reached and not enough above that was produced to maintain the State in the condition to which it had been accustomed. It was not economically able to meet the strain of some immediate circumstance, like war, and succumbed. Preceding that event, the economy of Society, on which State power rests, had deteriorated, and with that deterioration came a letdown in moral and cultural values; men “did not care.” That is, Society collapsed and drew the State down with it. There is no way for the State to avoid this consequence—except, of course, to abandon its interventions in the economic life of the people it controls, which its inherent avarice for power will not let it do.” – Frank Chodorov, “The Rise and Fall of Society”

  2. [1] You cannot add private, government and financial debt together. For the banks and pension funds their government bonds are assets. Bank funding (financial) is used to provide mortgage and business lending, which is double counting a bank debt with a bank asset. Balance sheets balance (if the accounting is honest). If the government did not issue bonds the private sector would not be able to save: people are still freely buying bonds at 2%. The real problem is the distribution of debts and assets, not the totals. It is the disproportional growth of private debt particularly that is a danger to demand and growth, despite all the hollering about public debt.
    [2] European debt ratios are not worse. Debts must be financed by revenues. Most European sovereigns actually have a much better revenue/debt ratio than does the US, and they state their consolidated public sector debt, not just that of the federal government. It is income that services debt, not turn over.
    [3] Health care will bankrupt the US. Medical services must be forced to post their rates and to charge everybody the same price for the same service — outside of the medical industry this is law. You cannot charge a black person more for a bicycle, or determine the charge for a care repair after the fact. Drugs need to face the competition of foreign manufactures. The US (and other Western countries) have to get back to a system where medical costs are paid out of pocket and insurance is required only for catastrophes. If medical prices are not fixed, the government will go bankrupt.
    [4] There is a reason for regulations in complex societies. Every promise to do away with them fails time and again. Improving the efficiency, fairness, and quality of regulation is a sane goal, not abolition. But there are no simple blanket formula’s for improving regulation — it requires piecemeal perseverence and discussion with the various stake holders.

  3. Another well meant set of fantasy “solutions” to a debt and obligation reality. We will have defaults of some sort (or some sorts) all over the nation and world before too long. The arithmetic just does not work. We have no interest in reducing spending and debt (as a percentage of real gdp) and have lost collective interest in even keeping track of either in a way that any honest accountant would certify.

    From the re configuration of inflation components tracked, to the overt debasement of the currency (ies), to the re definition of who is unemployed, it is all smoky and getting worse. Because we are too comfortabe right now to care, we put up with the smoke, and we will ut up with the smoke until we all choke on it. The coughing has already started, but we think that it will be kept to the lower elevations of the world, not seeping into our “Shining City on the Hill”. Too late, folks.

    Oh, it won’t be a catastrophic failure with Zombies and whatnot, but it will be a steady (and quickening) derogation of ability to consume the expensive trinkets, gew-gaws, knick-knacks, useless university studies, weapons systems that are unneeded and ineffective, houses not lived in, and 500 hp cars that never go over 80 mph that make up our “marginal” wealth. There is no avoiding it, only more or less successful mitigation practices that each individual will have to undertake, or not.

    The show is just getting started.

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