US Government Credit Card Debt

Every American knows that the US government has a debt problem.  Most can quote the $19 trillion debt number.  Many know the estimates of unfunded liabilities of $100 trillion or more.  Some even understand the use of fiscal gap accounting that shows the government is actually in the hole by $210 trillion in terms of present-value of future deficits and debt.  But what does all this actually mean?  How bad is it, really? 

The government debt problem is simple mathematics.  And the best way to understand the problem is to put yourself in the shoes of the US government.  What if the average American family had the same financial problems as our government?  In that perspective, you will see that the US government is terribly broke and can never dream of fulfilling all of its promises, much less actually pay back all the debt. 

This allegory starts will the median household income of $53,000 per year.  What if the average American household spent like the federal government, had debt like the federal government, and promised future payments like the federal government? 

For this US debt allegory, let’s assume that you, dear reader, have an income of $53,000 per year.  Unfortunately, you can’t make ends meet.  You spend about $60,000 a year, give or take a few thousand depending on how the year went.  You have been living outside your means for quite some time, and have been putting more and more money on your credit card each year.  Your credit card balance now stands at $315,000.  Because your debt is about six times your income, you can’t possibly make principle payments on the debt.  In fact, you have to take cash advances on your credit card just to make the interest payments.  Luckily for you, despite your desperate financial situation, the credit card companies have offered you a nearly unlimited credit line (for now) and have extended a very low teaser-rate of interest (that could change at a moment’s notice). 

How would you feel about your financial situation?  Given the fact that you only make $53,000 per year, spend significantly more than you make every year just to get by, have $315,000 in credit card debt and have to take cash advances just to make interest payments . . . you might be a little worried about it.  But never mind all that!  You are not a worry wart, so you assume that everything will be all right. 

Despite your financial problems, you remain a very generous person.  You are already sending money to help your elderly grandparents and an unemployed cousin, but you have taken a huge step beyond that.  You have promised to help out your entire family for decades to come. 

Armed with a seemingly unlimited line of credit from your credit card companies with low interest rates and interest-only payments, you decide to extend a series of promises to your large extended family.  First, you promise to pay college tuition for your children.  On top of all that, you have promised to support your struggling parents and in-laws, aunts and uncles through retirement.  But no problem!  The credit card companies will pay for that. 

In a moment of clarity, you decide to project your finances into the future.  How much will I be spending ten years from now?  How big will my debt be then?   What you find is troublesome. 

More and more of your family members will be entering retirement as the years progress, and you will be forced to spend more and more money in the future.  Your spending will grow uncontrollably from $60,000 this year, to $70,000 a few years later, and will continue to grow rapidly.  By 2026, you realize that you will be spending $90,000 per year. 

Then you wonder if your income might increase along with the expenditures.  Unfortunately, you are in a dead-end job with no prospects for promotion.  (In the real world, with the levels of debt in the private sector and public sector in the US at more than 360% of GDP, similar to the problems Japan faced in the 1990s, there are no real economic growth prospects for the United States; we are in the age of stagnation, but a full explanation of such is beyond the scope of this article).  While you have held out hope for something new, in a moment of truth you realize that you are stuck in your current job and will only see pay rises in the form of slight cost-of-living adjustments.   You finally come to the conclusion that your income will rise to $60,000 by 2026, while your expenditures will be $90,000.  So what does that mean for your credit card debt?  It is an ugly picture.  In just ten years’ time, your credit card debt will balloon to over $500,000, which will amount to more than nine times your income. 

Given this problematic outlook, you start to wonder about twenty years from now, or even fifty years from now (you are an immortal person, or so you think; historically, governments do die from time to time).  You realize that your financial situation only gets worse and worse.  More and more of your family members will be entering retirement going forward in a never ending increase; and they didn’t have very many kids of their own to help support them.  While the future is very much unknown, you anticipate that your credit card debt will reach $2 million dollars forty or fifty years from now, which will be upwards of twenty times your income. 

Now you really start to wonder.  Can I really pay all these promises?  Then you have an epiphany: “Uh-oh!!!  I never thought about it like that!”  You realize that the question isn’t whether you can pay all of the promises.  Instead, the question is, will the credit card companies continue to loan me money to pay for all of these promises? 

With an elementary understanding of how credit card companies work, your questions continue.  What if the credit card companies realize that my financial situation is this awful?  I only make $53,000 a year, spend more than I earn, but yet I already owe them $315,000, and that number is only going to grow exponentially in the future; what if they realize that I will never be able to actually pay them back with debt/income ratio?  What if they decide to stop throwing good money after bad?  What if they decide to raise the interest rate?  What if they demand principle payments instead of interest-only? 

Then the unthinkable hits you: what if the credit card companies refuse to raise my credit limit? 

You realize that your entire financial life—the wellbeing of you, your immediate family, and your entire extended family—it is all based on the undue confidence of the credit card companies in your ability to pay them back.  You now understand that this could all end in financial disaster and bankruptcy at a moment’s notice.  If your interest rates are raised, your financial situation becomes extremely dire very quickly and will only go to further reduce the credit card companies’ confidence in your financial situation.  If they ever decide to stop increasing your credit limit, the game is up and you have to file for bankruptcy. 

Then the ultimate truth hits you like a ton of bricks:  “I am already bankrupt . . . the credit card companies just don’t realize it yet.”

 

Back to the real world. 

In the real world, who are these credit card companies?  They are the holders and purchasers of US government treasury debt.  And to a certain degree, they are any person on the planet with green pieces of paper in their wallet (or US dollar digits in their bank account).  Whether you are holding US treasury debt or US dollars, you are showing undue confidence in the US government’s ability to pay back its debt without drastic money printing (already underway), currency devaluation, and inflation; you are the foolish credit card companies of the above allegory. 

The “credit card company confidence” in the US government—and by extension the US dollar—is quite literally the biggest confidence bubble in the history of the world.  When will lenders and US dollar holders realize that this debt won’t be repaid without drastic money printing and currency devaluation, if not hyperinflation?  It’s hard to say when, but the fact that it will happen someday is a forgone conclusion.  And when it happens, everything changes immediately

One fallacy of the US government debt situation is revealed in the common statement, “We are burdening our children and grandchildren with massive debts.”  That is the false assumption that the consequences of this debt will only be reaped far into the future.  While that may be true if the confidence bubble continues for decades to come, it is still a fallacy of omission.  The fact is that we could reap the consequences at any moment, whenever that confidence bubble bursts.  When the credit card is cut off, you and I, not just our children and grandchildren, will reap what we’ve sown in short order. 

Economic history tells us that investors and lenders eventually panic, especially when there is a reason to panic.  It is human nature for entire populations to start to worry about the same thing at the same time, and it takes the form of panic selling of the overvalued asset in question.  The result of the panic in this case—the collapse the US dollar—will be unparalleled in its worldwide devastation. 

When asked how he went bankrupt, Ernest Hemmingway quipped, “Two ways.  Gradually, then suddenly.”  The United States government has been gradually going bankrupt for decades.  One day that bankruptcy will become sudden, and the crisis of confidence in US government debt will probably take the form of the hyperinflationary collapse of the US dollar.  Invest accordingly. 

Notes:  All of the allegorical financial numbers start with the 2015 federal tax receipts of $3.248 trillion, set at $53,000 to put it in perspective of the median American household, and then all the other financial numbers are extrapolated proportionally from there (they do not represent actual debt levels per household in the real world).  For example, the federal spending in 2015 was roughly $3.687 trillion, 13.7% more than federal tax income, which rounded off comes to $60,000 in spending vs. the $53,000 income.  The $19.4 trillion debt is about 5.97 times the $3.248 trillion federal income, when multiplied by $53,000 comes out to $315,000 in “credit card debt.”   The increase to $90,000 comes from the Congressional Budget Office projections for 2026, and the $2 million in eventual debt uses a rough estimate of $100 trillion in unfunded liabilities.  The lack of increase in government revenue is the author’s own assumption that the CBO projections are optimistic, because there is actually very limited economic growth due to the massive debts, backed up thoroughly by various academic papers on debt hindering growth, and most notably the hindsight of Japan’s “lost decades” of 1990-present corresponding to similar debt and demographic problems.  But that assumption doesn’t much change the overall financial picture: the 2026 debt would be more like $440,000 if the CBO’s rosy assumptions prove correct, still totally outside the realm of potential repayment. 

References:  This allegory is partly drawn from a Heritage Foundation pictograph from 2014 titled: What if a Typical Family Spent like the Federal Government.