Update on the Debt Binge Being Perpetrated by Republicans

Today’s tweet by one of the investment world’s most respected economists:

This is what happens when a country elects a self-proclaimed “King of Debt” to the presidency.

Once again, Vera, I’m sorry for the mess my generation will be leaving yours. My generation adhered to the philosophy, “Live for today, don’t worry about tomorrow.”

At least your and your parents’ generations won’t be without any remedies. You can always slash the Social Security and Medicare programs.

The Graying of America

As the above chart shows, America is graying. Fast.

My generation (the Baby Boomers) (I’m one of the purple ones the graph) is the contributing factor. There are a lot of us. And now we’re rounding the final corner of life, which will have major implications for society.

  • The labor force is being restructured as Boomers retire in droves;
  • Demand for certain goods and services will decline precipitously (Amazon isn’t the only one impacting retail!);
  • Demand for certain other services (e.g., healthcare) will rise as a greater number of Boomers approach their mid-70s, when the deterioration in human bodies really begins to accelerate;
  • Demand on our safety nets, such as Social Security and Medicare, will drive government borrowing through the roof, dramatically increasing expenditures (including high interest charges), perhaps resulting in stiff tax increases, and possibly resulting in an erosion of the value of the U.S. dollar with all the unfortunate consequences thereof; and
  • In time, there will be a massive transfer of wealth from the Boomer generation to their children’s generation (but that will take time as most Boomers still have a quite a few years to live).

We saw this coming, of course. Big demographic shifts like this don’t sneak up on anyone. Some people prepared for it; many others did not. As a group (government), we haven’t prepared, which should make things interesting as related government expenditures balloon over the next decade.

This demographic transformation of America will be interesting to watch. It will have political ramifications. Economic ones, too. Social scientists should have a field day with this.

The Transformation of a Government into a (Bankrupt) Bank and Insurance Company

The U.S. Government now holds over 30 percent of all consumer debt. When you add in all the federal mortgage guarantees, it’s clear that our national government has slowly but surely become one huge bank underwriting the leveraging of its citizens’ balance sheets.

But, of course, that’s not all. The national government also is one humongous insurance company. It’s called Social Security, Medicare and Medicaid.

I’m not suggesting this role the national government plays in financing and insuring its population is bad. Or good. That’s for you to decide. But it certainly is dramatically different — from what it was 100 years ago, that is.

You might ask, How can the government afford all of this? After all, many borrowers default on their student loans, meaning the government (more precisely, its taxpayers) have to absorb those losses. Plus, the social safety net programs run at a large deficit, which will grow exponentially over the next few decades as baby boomers retire and put unimaginable strain on the Social Security and Medicare systems. So how indeed does the government afford to keep these programs alive?

It’s simple: it borrows. How ironic that the country’s largest bank and insurance company also is one of the world’s largest debtors.

And who does it borrow from? Lots of lenders, including real banks, insurance companies, pension funds, endowments, individuals and a host of countries, the largest being China.

But surely there must be a limit to what constitutes prudent borrowing, you might ask. History tells us there is. More specifically, history tells us that once a country’s debt exceeds 90 percent of its GDP, the debt becomes a drag on growth. Well, ours has or will soon exceed those levels, meaning that it’s likely we’ll grow slower than our potential and that our standard of living will suffer.

That shouldn’t come as a surprise to anyone. But, for reasons I don’t fully comprehend, we’ve decided to take from our children and their children so we can have more today. That tells you something about our character, I suppose.

The other thing that can happen — and which may be happening now — is that the debtor nation’s currency can become less valuable. If that happens, inflation can ensue, further eroding purchasing power and the debtor nation’s standard of living. Given how the U.S.’s currency has been reacting lately (somewhat akin to an emerging market country’s currency, which, of course, isn’t good), it’s possible we’re beginning to see that erosion accelerate. But we still have a ways to go before it becomes a problem. The concern, however, is that these things can unravel quickly. And when they do, it will be too late to reverse the effects.

All and all, it’s a troubling development, this transformation of our national government into a bank/insurance company. Perhaps it wouldn’t have been so bad if we had decided to bear a larger portion of the costs as they were incurred. But we didn’t. Instead, we decided to put the bill on our national credit card. While cutting taxes for the wealthy. Surely, over the long term this is a disaster in the making.

It might be a good time to convert some of those savings to renminbi.