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October 19, 2015

Consider the following financial story. Big Joe Spender is a successful attorney who works for Federal Gross National Products. Though his salary and bonus varies depending on how well the company is doing, he most recently got a big raise and made $300,000 in total after-tax compensation in 2014, his best year. Despite his excellent compensation, Joe has substantial debts outstanding. His mortgage on his first home is a variable rate mortgage which he owes $800,000. However, the home was awarded to his first wife in a contentious divorce settlement in 2008 ( while Joe remained responsible for the mortgage payments) . At the same time the recession in 2008-09 led to his total compensation being cut to $200,000. Joe also reacted badly to the bad economy and his divorce by moving to Park Ave luxury rental in NYC upping his spending to $360000 a year (high rents, restaurants , travel, lavish parties ) during 2009-2013 meaning he had to borrow an additional $800,000 over this period.

By early 2015 , Joe owed more than $1.8 million and was having difficulty making his surprisingly low-interest payments of $25,000 a year. He had managed to negotiate his mortgage loans as interest-only repayments by failing to disclose all his other loans and expenses. He did the same when he rolled over his short-term loans. Somehow, almost miraculously, he was able to do so at a low-interest rate. As he had trouble getting further loans, he turned increasingly to his crooked friend Fred who was willing to lend him, interest-free, counterfeit bills totaling $400,000 which he had printed in his basement. Nonetheless, his creditors were quickly catching up to him, the FBI was getting suspicious and Joe was getting pretty worried.

Joe had been able to curb his spending a little but still was spending more (about $345,000) than he was making (about $300,000). In the long run, the picture was even bleaker, because he not only had the mandatory interest payments for both his wife’s house and his other debts, but he was ALSO required to make growing mandatory medical and retirement payments for his wife (She had a great divorce lawyer!) which were expected to grow by another $100,000 per year in just a few years. Not only that but Joe was a clinically diagnosed, shopping/spending addict. He literally couldn’t help himself and “had” to spend more than his salary on his Park Avenue rental, fancy dinners every night, butler, maid and chauffeur services, expensive travel and very expensive wines. So while he had accumulated some assets (e.g. an expensive gun collection, and a few patches of cheap forest land in the boonies), these paled in comparison to his total debt of $1.9 million+ and growing.

Bottom line: assuming Joe can still find short-term lenders and get Fred to print up some more counterfeit money loans, by 2020 or soon thereafter:

  • His total debt will grow to $2.1-2.3 million.
  • His annual interest payments are expected to increase to more than $100,000 per year

Does Joe’s story seem plausible to you? Of course not. Why would anyone keep lending money to him let alone on highly favorable terms despite his obfuscations and fraud? How is it that he is not in prison now?

Unfortunately, this is not a fictional story but all too real except on a much bigger scale. Multiply all the numbers by 10 Million , replace Joe with the federal government, his crooked friend Fred with the Federal Reserve, counterfeiting with money printing and Joe’s addictive spending with business as usual in the government, and his wife medical and social security  with Medicare and Social Security and you’ve got the story of the U.S. economy and government over the past decade or more and for the foreseeable future:

  • $18 Trillion in Debt in early 2015 up from $8 Trillion in 2008.
  • $4 Trillion in New Money Printed by 2015 which quintupled the U.S. Money Supply in 2008
  • $100 -200 Trillion in future liabilities for Social Security, Medicare and Medicaid
  • Continued substantial deficit spending of $438 billion in 2015 even in spite of large tax increases,  an economy which may be at its peak and some, albeit small, declines in government spending.
  • Future debt to swell to $21-23 Trillion by 2020, with interest payments (with eventual interest rate increases) rising to more than $1 trillion per year.

Barring massive cuts in government spending including future Medicare and Social Security payments coupled with major tax reform (where the existing tax code is completely eliminated and our tax system is made much more efficient), I see very serious consequences for the U.S. economy.


Ah well, on to another “cheerier” music blog next time.

  1. nancy forbes permalink

    Countries printing money was discussed in 1952…my college days…BAAAAD!!
    Nancy Forbes

    • Yes. This is economics 101 and the basis for which Milton Friedman won the Nobel Prize. Or as the movie says “Follow the Money”. Unfortunately, the Fed and many of our supposedly esteemed economists are fans of money printing and government stimulus. So far this has worked ( a little bit) but not too much obviously given our slowest recovery in the last 75 years. The problem is that we haven’t started to pay the consequences of our short term excesses which I’m afraid will come in just the next few years. While I am hopeful that a new Administration might actually address it and reverse some of our spending insanity, I am afraid it will probably be too little too late.

  2. Ethan Ravage permalink

    Hi Bruce – what do the scary #s represent as %s of GDP?

  3. We are close to Debt being equal to 100% of GDP. But I think that is the wrong way to think about how bad the federal debt is. The reality is that we can raise around 18-24% of GDP in taxes. The upper end assumes we are in the peak of a recovery which is where we are right now in all probability. But even this doesn’t represent what we can actually use to ultimately pay down the debt which is arguably at the very best less than 2 or 3% of GDP. This as any banker would tell you is a terrible ratio to lend money with no collateral. (Federal Debt Not the same as a home mortgage of course which is at least backed by the home). Companies and individuals have to be generating free cash flow (and a lot of it) to borrow lots of money. Bankers use ratios like current assets/ current liabilities with 3-1 or 4-1 at least to make them comfortable to lend money to a corporation. But the US Govt. has far more current liabilities than current assets and no free cash flow to speak of. The only power we really have is the printing press and the historic strength of the dollar and the US economy, but the more we print the more likely we see the dollar crashing, interest rates soaring and the US government defaulting on debt. Another words barring a miracle we are ultimately screwed.

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