In Debt in a Big Way

By now, most of us know that debt is a problem for our country. The first obvious sign was when the savings rate dropped to zero in 2005. That meant consumers were spending more than they were making. The trend had been downward for quite some time. The dip below zero was the cough of the canary in the coal mine. (For non miners, canaries were used to test for lethal levels of ordorless gas in mines - if the bird died, it was time to get out quickly.) The drop in the savings rate was accompanied by the rise in people taking on mortgage debt they could not afford. That led to the really big crisis in the housing market and the subprime loan disaster with its consequent foreclosure binge. The effects of that are still lingering despite government attempts to help home owners renegotiate mortgages. After one year in operation, about 0.2% of the $75 billion to help that happen has been deployed in the market. So much for government help for homeowners.

In the press lately is the government's debt level. It has been escalating dramatically. It was driven upward in the Bush years by ill-conceived tax cuts and two "off-the-books" wars. To the new administration's credit, they have moved the cost of war back on the books where it belongs. The debt continued to grow with the TARP program to bail out the banks who help bring us the mortgage fiasco (egged into it by Congress and the Community Reinvestement Act provisions and administration). Most recently, it has been further compounded by the stimulus bill, aka, the American Recovery and Reinvestment Act (ARRA). Add to this a decline in tax revenues from the deprecession and the deficit situation worsens. In the past ten years we have gone from a budget surplus to continually escalating government deficits. The national debt has tripled from $4 trillion to $12 trillion. Sadly, the trajectory upward looks to be continuing.

The federal government is now feeling some of the pressure that state governments have felt. Many state governments are required by their state constitutions to maintain a balanced budget or a surplus -- no deficit spending. As a result, they must cut expenditures (services) or raise taxes. The newly elected governor of New Jersey is on a crusade to do this with a venegence necessary to save his state. California seems to keep dancing around its equally hard facts of fiscal life. Many states have survived the last year or so due to the stimulus funds provided to them by the federal government. This is so brutally ironic that it seems unthinkable.

The states cannot run a deficit. The feds can. The feds create a deficit and give the money to the states. This is back door deficit financing for the states. It is beyond absurd. All this money needs to be recovered at some point from the taxpayers. It matters not if it comes from state or federal taxes with the exception that the different taxation systems may redistribute who ultimately pays the lion's share.

The ultimate meaning of all this is that the government has been living beyond its means just like the overmortgaged homeowners were. The size of the debt is about to become like the little puppy who grows up to be the 150 lb dog that pulls the owner down the road. The government's answer is to keep on running deficits. All this does is postpone the inevitable and guarantee the payback will be bigger and harder tomorrow than it is today. More and more it appears our choice will be between a depression today or an all-out collapse in the not-so-distant future. This is not a problem for our grandchildren, it is our problem now.

Tack onto this the huge amount of the budget consumed by Social Security and Medicare and the problem expands even more. The influx of baby boomers into these two programs will place demands on them they are unable to meet financially. This becomes an economic perfect storm. The government cannot practically fund these programs at their current levels for the incoming recipients (even without the added pressure of current and future deficit spending). Given the lack of retirement savings rampant in the USA, it looks like the next 30 - 40 years will see the return of "poor old folks" who move in with their children to survive. We will go from "boomerang kids" to "boomerang grandparents."

The book, "Comeback America" presents a good picture of what is happening to our debt and what can happen to our country because of it. It will be painful to reign in spending, but many Americans must radically change their view of government from the omnipotent overseer and benefactor of the populace, to a barebones protector of state security, personal freedom, and facilitator of fair-handed commerce. We simply cannot afford the government we have because we have been buying it on credit.