Skyrocketing National Debt Setting Up U.S. for Economic Collapse
U.S. national debt is skyrocketing. This may not look like a problem for now, but soaring debt could cause an economic collapse in the United States. Be very careful. At the time of this writing, the U.S. national debt stands ridiculously close to $20.0 trillion. (Source: “The Daily History of the Debt Results,” TreasuryDirect, last accessed June 1, 2017.)
How did we get here? It was combination of things.
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For example, in 2008–2009, the U.S. government jumped in to help the U.S. economy. The reasoning was that, if it didn’t, there would be a severe economic collapse—the banking sector would collapse, Americans wouldn’t have jobs, and U.S. gross domestic product (GDP) would plummet.
As a result of this, for several years in row, the U.S. government incurred budget deficits of more than $1.0 trillion. This caused the total debt to skyrocket.
Please look at the chart below. It shows the trajectory of the U.S. national debt over the years. You will notice that, since the Great Recession of 2007–2009, government debt has seen an almost vertical rise.
(Source: “Federal Debt: Total Public Debt,” Federal Reserve Bank of St. Louis, last accessed June 1, 2017.)
If this were all, it wouldn’t be as worrisome.
But sadly, the government debt figure could soar significantly, and it could have dire consequences—and that includes the possibility of an outright economic collapse.
There are four things that must be considered: interest on already-accumulated debt, interest on future deficits, tax cuts, and a pension crisis.
Interest on National Debt to Balloon
It’s important to understand that for the money the U.S. government has already borrowed or borrows going forward, it has to pay interest on it.
For instance, for the fiscal-year 2017 that ends in October, the U.S. government has budgeted a total of $431.05 billion for interest on the debt! (Source: “Monthly Treasury Statement,” Bureau of Fiscal Services, last accessed June 1, 2017.)
Know this: if you look at the long-term forecast by the Congressional Budget Office (CBO), there are no budget surpluses in sight until at least 2027. Between fiscal-years 2018 and 2027, the deficits are expected to sum up to about $9.4 trillion. (Source: “10-Year Budget Projections,” Congressional Budget Office, last accessed June 1, 2017.)
Keep in mind, for every $1.00 of deficit that the U.S. government incurs, it increases the national debt. So, in the next 10 years, we could be looking at a U.S. national debt of over $29.0 trillion.
Remember! The U.S. will have to pay interest on it, and this can only balloon the national debt further, given that interest rates are expected to go higher.
The Biggest Tax Cuts in History Coming Soon
If you have paid attention to the news lately, chances are you have heard that there could be tax cuts coming soon—for individuals and for corporations. The planned tax cut is being dubbed one of the biggest in the history of the U.S.
These tax cut plans have investors really excited. They are buying stocks and taking key stock indices over their all-time highs. The idea here is very simple: as taxes go down, income will increase. This should lead to higher stock prices.
Have you seen the key stock indices lately? Look at the chart below of the NASDAQ Composite Index.
Chart courtesy of StockCharts.com
Great, right? And, the chart literally pours cold water on the idea of economic collapse, too!
Be careful though. Don’t be too quick to judge. It must be asked what the tax cuts will do other than raise the profits of companies.
You see, from the news sources, we hear the corporate tax rate would be cut from 35% to 15%. If this is actually the case, don’t you think it will impact government’s tax revenues? It certainly will.
All of a sudden, for example, if the U.S. government was getting a tax revenue of $100.00 from a corporation, it will now be getting $85.00.
Now, simple arithmetic here: if the government’s expenses remain the same, and revenue suddenly declines, what do you think will happen? The government will need money to continue. What will it do? It will go out and borrow. Therefore, we could be seeing a huge spike in national debt in a very short period.
Pension Crisis Across States and Cities
You may not hear it during the evening news or read it on the first page of the newspaper but, currently, there’s a pension crisis at the state and city levels in the United States. Those pension funds are severely underfunded, and could hurt the retirement incomes of many if this remains the case for the long term.
Take Illinois, for example. The state’s pension funds’ funded ratio is just 40.2%. (Source: “U.S. State Pensions: Weak Market Returns Will Contribute To Rise In Expense,” S&P Global Ratings, last accessed June 1, 2017.)
What does a funded ratio of 40.2% mean? At its core, it means the Illinois pension funds only have $0.40 for every $1.00 it needs to pay out.
It’s not only the Illinois pension funds that are in dire need of money. New Jersey’s pension funds have a funded ratio of just 37.8%
Don’t just stop here. There are only two state pension funds that have more money than they need; Wisconsin, with a funded ratio of 102.7%, and South Dakota, with funded ratio of 104.1%.
Looking at this, there’s one question that must be asked; if these problems persist, where could these pension funds be looking for help? If you guessed the U.S. federal government, you may be right. It could become reality sooner than later.
This would cause a super spike in the national debt. Remember, the U.S. government doesn’t have money to begin with. Just above, I mentioned the $29.0-trillion national debt. If the U.S. government has to bear the burden of pension funds too, the debt would go well beyond that.
Why U.S. National Debt Matters And Why It Could Create an Economic Collapse
These days, there’s a huge debate that says national debt doesn’t really matter. It’s just a number that should be disregarded.
I look at it differently.
Yes, in the short term, national debt doesn’t really matter. Sometimes the government has to do things that are not so popular, like spending money on infrastructure and other related necessities.
You see, it’s a problem when you see the government spending without any remorse and there’s no sign of it stopping anytime soon.
For every $1.00 of debt that the government incurs, average Americans are on the hook for it. They have to pay for it sometime down the road.
With the U.S. national debt currently at around $20.0 trillion, each U.S. citizen owes a little over $61,000. (Source: “U.S. Debt Clock,” US Debt Clock.org, last accessed June 1, 2017.)
From here, there are two options: either the U.S. government tells its creditors, “Sorry, we can’t pay you,” or the government starts telling its citizens, “Pay more taxes.”
If we assume that the U.S. government doesn’t pay its debt, it would have to default on that debt.
What If the U.S. Doesn’t Pay?
If we assume U.S. government doesn’t pay, it would have to “default,” on its debt.
You know what happens when a country defaults on its national debt? Look at Greece.
The Greek government, not too long ago, said it couldn’t pay. This caused chaos into the country. It witnessed an economic crisis so severe that it still hasn’t been able to recover. Troubles began in the country back in 2011.
Unemployment in the country still remains significantly high, and growth rates are just outright dismal.
Mind you, the goal here is not to single out Greece. Look back in history: whenever countries have defaulted on their debts, a severe economic collapse followed.
What If the U.S. Asks Citizens to Pay More?
Here’s what investors have to understand: consumption is one of the biggest factors that drives the U.S. economy.
Now, if the U.S. government tells businesses and individuals to pay more in taxes to pay off the government’s creditors, this could really have dire consequences across the board, and consumption could take a severe hit. An economic collapse could follow.
For example, higher taxes would mean less disposable income for average Americans. You know what that means? If their income goes down, they would be buying fewer cars. All of a sudden, their homes could become unaffordable. And the list goes on.
This phenomenon could cause a massive decline in consumer spending, which could essentially lead to an economic collapse in the U.S. economy.
For businesses, if there are more taxes imposed on them, they are left with very few options. Either they won’t expand as they would in a normal tax environment or they will simply move their operations elsewhere. This could be devastating and lead to a complete economic shutdown or collapse.
In conclusion, the U.S. national debt is currently taken too lightly. It may not be a problem for a year or two, or maybe even five, but this could really haunt future generations to come. Don’t ignore it. It foretells an economic collapse.
