Antony Davies, Phd goes through a listing of 10 Myths about Government Debt. For future blog posts, I will attempt to expand on each of these 10 myths. This growing debt is a huge issue, not only for current generations, but for those to come in the future. As mentioned in the video, Dr. Davies does provide a “solution” to handle the Government Debt. It is a must see. Take copious notes.
Excerpt: “The U.S. budget deficit likely will break the $1 trillion barrier in 2020, the first time that has happened since 2012, according to Congressional Budget Office estimates released Tuesday.
After passing that mark this year, the deficit is expected to average $1.3 trillion between 2021-30, rising from 4.6% of GDP to 5.4% over the period. That’s well above the long-term average since around the end of World War II. The deficit since then has not topped 4% of GDP for more than five consecutive years, averaging just 1.5% over the period.”
This simply means more borrowing will take place to “true up” the deficit. Since this will take place, inflation will rise, as inflation is the expansion of the monetary bases. Pundits will celebrate the growth of the stock market, and state this is a measure of good economic growth. Is it?
With interest rates locked in at rock-bottom levels courtesy of the Federal Reserve’s easy-money policy after the financial crisis, companies found it cheaper than ever to tap the corporate bond market to load up on cash.
Bond issuance by American companies topped $1 trillion in each year of the decade that began on Jan. 1, 2010, and ends on Tuesday at midnight, an unmatched run, according to SIFMA, the securities industry trade group.
In all, corporate bond debt outstanding rocketed more than 50% and will soon top $10 trillion, versus about $6 trillion at the end of the previous decade. The largest U.S. companies – those in the S&P 500 Index .SPX – account for roughly 70% of that, nearly $7 trillion.
Yes, you read that correctly. Well, let’s be more precise: Per the survey done by GObanking Rates, 69% of Americans have less than $1,000 in savings. Erratum: My title has 70%, so I’m sure that 1% makes a huge statistical difference for some. This survey has been done each by this organization since 2014, and for the 2019 survey, it contains 846 respondents.
An argument can be made that they only polled 846 individuals. Fair point. But, I would not be surprised if more respondents were polled, the percentage would not change. There is a myriad of reasons why, but I will mention some here.
50 Percent of Americans Earn $33,000 per year or Less
I recently reported that 50% of Americans earn $33,000 per year or less. This analysis was provided by the United States Social Security Administration. Yep, that is correct: $2,750 per month. This amount is before taxes. Consider housing, food, transportation, child care, and etc, as the expenditures eat into the gross/net income. Since this is the case, it makes it difficult to save money due to the next point…
Rising Cost of Living aka Inflation
The issue of the rising cost of living, specifically for those earning less than $33,000 per year, makes it increasingly difficult to develop any sort of savings. The core issue of the increased cost of living is due to inflationary measures. If you have read the articles on this page, the issues surrounding inflation are constantly addressed. Inflation is not the rise in prices, although the economic actor will see prices rise. When The Federal Reserve continues with loose monetary policy, the winners are the large financial institutions, the cost of inflation is paid by those who earn less than $33,000 per year.
As the dollar is devalued based upon the implementation of loose monetary policy by The Fed, it takes more dollars to buy the goods these people want and need— giving the illusion that prices are actually rising. Due to this economic phenomenon, people in this economic income segment have almost no savings to cover for emergencies. When those emergencies come, these individuals must lean on credit to cover these unforeseen expenses. Once the crisis has ended, the user is stuck with a credit card balance, as this adds to their monthly expenses—these expenditures are currently very close to their income. At this point, many can not continue to pay the regular expenses, and the mounting credit card debt. What happens next? The credit card is defaulted.
Credit Card Default Rates Rising
Due to the lack of income, coupled with the lack of savings, it is no shocker that credit card default rates are on the rise. To be specific, the credit card default rates are on the rise for sub prime borrowers. This trend isn’t exclusive to just credit cards, it is also expanded to other sub prime lending sources such as pay day loans, auto loans, and the like. As previously mentioned, these types of credit are used to help cover the income gap in expenses or cover emergencies. Another source will be for medical expenses as well, due to the rising prices of health care.
At the time of this writing, political pundits will remark how fine the economic metrics look, namely how unemployment is so low. Kudos. Yet, there signs of things that could lead to a market correction, namely in the capital markets. Some of the prime reasons, in my opinion, is based upon Americans not having enough in savings, and the central banks pumping more currency into the banking system. However, since we are living in a consumption based economy(meaning consumption now versus later), there is very little incentive to save..thanks to inflation.
My apologies are given in advance. Why? I’m presenting more information regarding repurchase agreements. As a reader, it is should be simple to deduce that recent extreme use of repurchase agreements is worthy of strong consideration and concern. If this your first time reading about these, feel free to read this article, written by me, describing repurchase agreements(repos). If needed, read that article first, then return back to this writing.
In this blog entry, “How Excessive Government Spending Sparked a Liquidity Crisis”, Craig Eyermann lists how the implementation of the use of repos makes, since September 2019, The Federal reserve is the largest holder of United States Government debt. Many of the points made in his article should raise some concerns; which is why I continue to repost articles related to this subject.
Regardless how the mainstream news media spins this, inflation is a monetary phenomenon. Of course, these individuals will state that inflation is low citing the Consumer Price Index as support of this spurious claim. Rising prices do not always constitute inflation, due to the fact the prices of all goods are not homogeneous.
The expansion of the monetary base(inflation)is directly correlated to the overspending by the federal government. With this over spending, deficits are generated, and debt is used to balance the budget. The budget never is balanced since the behavior is rewarded. The losers, in this scenario, are the individuals who are savers or on a fixed income stream. Also: The individuals who are lower income earners.
Congress, the Grand Stewards of the Federal Government’s treasure chest, have continued down the road of fiscal perdition. How? For the first two months of the Fiscal year of 2020, the United States Federal Government’s deficit has grown $342 billion, per the Congressional Budget Office. This represents a 12 percent increase over previous periods. Based upon the CBO, the Federal Deficit will average $1.2 Trillion per year between 2020 and 2029.
What Does This Mean?
With the proliferation of federal government spending, combined with ever increasing budget deficits, this leads to more activity of the growth of the government debt. Debt security instruments, such as United States treasuries, are sold to obtain cash in order to “true up” the deficit. Purchasers of Government debt can be foreign nations, but on the domestic side, The Fed is the largest purchaser of Government Securities. Back to the transaction, once this transaction takes place, this expands the money supply. It is expanded with injecting the cash, by the sale of the treasuries, into the money supply when the fed purchases them. The Fed’s balance sheet continues to grow along with the ongoing purchasing of debt securities. A quick reminder of the concept of inflation: It is the expansion of the monetary base.
The Road of Fiscal Perdition
With the expansion of the federal government entitlement programs, such as Medicare, Medicaid, and Social Security, it only makes sense that the deficit will average $1.2 trillion per year over the next decade. As the baby boomers begin to draw down social security benefits, the demand for health care will rise. This will place a strain on resources, pushing health care costs upward. Also: Inflation has a deleterious impact upon savers and individuals that are on a fixed income. Since the value of the currency declines, this reduces the purchasing power for goods. This creates a situation that more individuals become more dependent on Medicaid and other Government social programs.
Due to the overwhelming use of government resources, the deficit will continue grow. This will lead to more borrowing, which will lead to more inflation, which leads to more individuals struggling to cover their expenditures. Good luck building wealth in this economic environment.