Roll Them Bones

  • by Pete O'Brien
  • 01-31-2021
So, we’re about to add $1.9 trillion dollars to our spending for the year. That’s $6,000 for every man, woman and child in the country. Additional debt. 
So, how bad is the debt really?
First, a few thoughts about debt. The general rule of thumb - the one recommended by the US Government - is that debt, that is to say, the amount of money you pay to service debt, to include your home mortgage (to include the real estate taxes and mortgage insurance), should not exceed 36% of your total income. So, using easy numbers, $100,000 per year, you should play no more than $36,000 in servicing debt. Thus, if your mortgage were $3,000 per month, you should carry no other debt. That equates to - give or take - about a $350,000 mortgage, or 3.5 times your income. Again, this would mean that you have no room for other debt, you need to buy your next car with cash… So, save your pennies. 
The US managed to survive with relatively small amounts debt until the 1930s. Since then, it’s been climbing. A lot. And the value of our money has been falling. Also a lot. While the slide down the hill really began in the second decade of the 20th century, the “sleigh ride” didn’t really pick up until the latter half the century, and really accelerated in the last 12 years. 
But federal spending is really only the very tippy top of the debt iceberg. In an article published a bit over a year ago, before the Fed really cranked up the printing presses and generated the amazing debt of 2020, the investment firm Alliance Bernstein put out a study of US debt, in all its various facets.
They compared the debt to the 2018 US GDP - the US GDP has since climbed, but so has the debt.
- Federal, state and local government debt combined 100% of GDP
- Households and corporations 150%
- Financial debt which Alliance Bernstein defined as: “Debt which carries “conceptual issues and risks,” namely that debt held by financial firms often represents potential in a worst-case scenario involving various derivative instruments that can carry high notional levels that are unlikely ever to be realized.”  450% 
- Trusts for social insurance programs 27%
  • All the promises from current social insurance programs 484%
- The “Infinite Horizon” value of obligations for social programs 633%

Per Alliance Bernstein, this totals to 1844% of current GDP. Current GDP sits at roughly $22 trillion. So, using Alliance Bernstein’s numbers, that would place our total debt in the neighborhood of $405 trillion. 
Returning to the rule of thumb, the US Government recommends debt payments to run to no more than 36% of income. And as we pointed out, that works out to roughly 3.5 times your gross income.
With our current GDP, that means debt servicing should run to no more than $7.9 trillion per year (call it $8 trillion), and total debt to no more than $77 trillion. Call it $80 trillion.
If the average cost of money on all that debt is just 2%, then we are already paying out $8 trillion per year on debt. Payments on just the US Federal debt has exceeded $500 billion per year since 2018. And it’s climbing.
And so is the mountain of debt and the mountain of money due out to various entitlement programs.
So, what to do? Is there any path ahead to get that total number to even half of what it is, to dip down below $200 trillion some time in the not so distant future, never mind getting it to the range of $80 trillion?
The answer, unfortunately, is not really. Governments everywhere have not simply grown addicted to the idea that they can print money; more importantly, “printing money” is how to pay off debt. By steadily increasing the money supply old debts become, relatively speaking, smaller. An ever upward climbing total money supply therefore can make all the old debts seem insignificant. Constant inflation is the tool to pay off old debts. From the birth of this nation until 1913, the value of US currency climbed more than 2% per year. Since the Fed was created in 1913, just 107 years ago, the value of the dollar has fallen by 93%.  
That is the only answer the government has to address the debt.
Hmmmmm… Just think, if they can manage this for another 25 years we will have a Quadrillion dollars in debt! Pretty exciting.
But it all depends on one thing: that the folks at the Fed keep just ahead of any unseen crisis, that every crisis will, in the end, be successfully managed by slowly or quickly increasing the money supply. 
What are the odds?