It's The Night Before The Battle Of Waterloo And I'm Going Dancing At The Ball

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by: Michael Chandler

Summary

The US is living way beyond ours means.

With rising rates the cost to service our debt could easily double.

Non-discretionary spending must be addressed ( entitlements).

Individuals should pay off debt and increase savings in preparation for higher rates.

Somebody's got a say it, might as well be me. I wrote most of this article last week and was asked by my wife and one of my closest friends to let it sit and even take a different look in an attempt to soften it, by providing advice as to how we as individuals should prepare. I followed their advice and let it set for four days. I've come to the conclusion that we are a nation of wimps; particularly in Washington. The attitude has been to walk around with blinders on for too long. "As in Waterloo we dance tonight and die tomorrow". Therefore, I've decided to draw an even harder line on the seriousness of the debt of this nation.

Two days ago the White House delivered its proposed budget for fiscal year 2019. It was $4.4 trillion, almost $800 billion more than is expected in tax revenue. This morning the spin from the White House was its $3 trillion under the baseline budget over the next 10 years. Now on the surface that sounds impressive but let me tell you what that really means. Let's say you were projected to gain 100 pounds over the next year. At year-end you only gained 75. Therefore you saved 25 pounds. Really! Yeah they call it baseline budgeting.

Folks, it's not just Trump, other tricks of the trade were used in years past. For instance, every single budget that came out of the White House under Obama projected a 4% GDP growth rate. It never got above 1.8%. Smoke and mirrors, and it doesn't matter who's in office Democrats or Republicans. Washington is littered with politicians and bureaucrats alike and they seem to only have their own self-interest at heart.

Many people don't realize that the US budget is divided up into two parts discretionary and non-discretionary. Non-discretionary is made up of all the entitlement programs such as Medicaid, Medicare, Social Security, debt service and numerous welfare programs. These programs are on automatic pilot and will ultimately consume most of our tax revenues. No elected official has the guts to reform these programs simply because they are afraid they will not be reelected. They choose to dance tonight and die tomorrow.

I know, you have all heard this before and for some reason it apparently was not high on your priority list to make a difference, and you too choose to dance. Hopefully this next section of this article will help you understand. It's quite an eye-opener!

Currently, our national debt is $20,494,086,701,228, and yes that is almost 20 ½ trillion dollars. The US debt is tantamount to $62,818 for every man woman and child in the United States. Stated differently, it amounts to $170,000 for every tax payer in the US.

$475,462,811,468, is a number I'm relatively sure you don't know! This is the amount we will pay in debt service (i.e. interest expense) in 2018 and every year thereafter assuming we don't increase our debt one red cent. The interest expense currently is 2.326% on our national debt.

As I am sure you are all aware interest rates have been very low for a very long time. Furthermore the economy is building up steam and the Federal Reserve continues to normalize rates by increasing Fed funds on a regular basis. Today the 10 year Treasury is trading at a 2.90% yield. Some economists believe the 10 year Treasury is on its way to 3.5% this year.

Prior to the financial collapse in 2008 the average cost to service our debt was approximately 5% according to Treasury Direct. If our current interest expense of 2.326% were to increase a mere 2%, well below the historical average, our annual cost to service our debt would increase to $886,574,180,695. Keep in mind this is if we do not increase our national debt from its current levels.

If rates were to increase that 2%, our interest expense would be close to 25% of our total budget. That would mean one out of every four tax dollars would go to debt service only.

We are now told we will add $1 trillion to our budget deficit this year.

Last week, in Congresses infinite wisdom, it added another $396 billion.

The interest rate costs are a direct reflection of the ability of an individual or a country's ability to pay its debts. If you are viewed by your lenders as a credit risk, the interest cost rises, assuming you are even granted credit. Countries are no different. Here in the US 42% of our debt is purchased by other countries. What happens if our ability to service and pay our debt becomes or is simply viewed as a problem? Its simple, our cost of capital rises and interest rates increase accordingly.

One of the measures of determining whether a country can sustain its debt load and pay its creditors is its debt to GDP ratio. The US debt to GDP ratio is currently 106%. Out 158 countries the United States has the 12th highest ratio. Here's what the top 12 look like as of December 2016:

Country

Last

Previous

Highest

Lowest

Japan

250.40

Dec/16

248

250

50.6

%

Yearly

Greece

179.00

Dec/16

177

180

22.6

%

Yearly

Lebanon

146.00

Dec/16

140

183

131

%

Yearly

Italy

132.60

Dec/16

132

133

90.5

%

Yearly

Cape Verde

130.97

Dec/16

128

131

57.17

%

Yearly

Portugal

130.40

Dec/16

129

131

50.3

%

Yearly

Jamaica

122.80

Dec/16

124

212

70.5

%

Yearly

Mozambique

120.00

Dec/16

88.1

138

37.5

%

Yearly

Bhutan

118.60

Dec/16

98.9

119

36.9

%

Yearly

Singapore

112.00

Dec/16

103

112

67.4

%

Yearly

Cyprus

107.80

Dec/16

108

108

44.7

%

Yearly

United States

106.10

Dec/16

101

119

31.7

%

Yearly

To help put this into perspective the European Union's collectively has a debt to GDP ratio of 83%. With the exception of Japan all of the countries ahead of us are Third World emerging markets or simply economic disasters.

The US budget for the current year is expected to be around $4 trillion after the Congressional action last week. Projected tax receipts are $3.654 trillion. Of that amount $1.36 trillion will be spent on Social Security, $1.05 trillion will be spent on Medicaid, Medicare and other health related programs. If you add $0.47 trillion in debt service we have spent $2.88 trillion of the 3.654 trillion received. This leaves approximately $774 billion to fund all of the programs including a $700 billion defense budget.

I wonder how far $74 billion will go to fund all other government programs such as education, agriculture, energy, commerce etc. etc. etc.? My guess is not very far, and of course that means more debt.

"We are headed towards the cliff, but we haven't gone over the edge yet. When will that happen? Anybody's guess. People need to be warned how to protect themselves."

This was part of a conversation I had earlier this morning with one of my dearest friends. I have thought about this for the last four or five hours and come to the realization that he is correct and certainly deserves a well thought out answer.

We have danced and danced for many, many years and walked around with blinders, never addressing this issue seriously before. I liken it to maintenance on a vehicle. If you neglect to change the oil, your engine will blow up. A $50 oil change is a whole lot cheaper than replacing the motor. Another way to look at it would be if you don't take your blood pressure medicine you could have a stroke. The government debt is no different. It's been neglected for many years.

We are in fact way overdue when it comes to addressing our balance sheet issues. From that sense we are already over the cliff.

We must address entitlement programs immediately, but there is no one in Washington manly enough to address that issue. You see they are simply afraid of not being re-elected. They like their cushy jobs in Washington.

Secondly, we could rectify some of this situation with term limits. You see if the Congressman knew they would only be there four or six years then maybe they would find the strength to address the hard issues. That of course, is simply my opinion.

Finally, when only half or less of our registered voters show up to vote on election day what should we expect? Apathy among our citizens must be turned around some way. Unfortunately, it takes somewhat of a catastrophe for registered voters to show up at the polls.

As far as individuals are concerned, from a financial perspective they need to eliminate their own personal debt and increase their savings as much as possible. That rainy day fund will be necessary in the near future, believe me! We need to leave the dance early and prepare for battle tomorrow.

Economically the country is doing well and I do believe we will have 3% to 4% GDP growth in 2018. Our balance sheet is another story.

I know this article was hard to swallow but it was necessary. I hope it opens all of our eyes to the task we have ahead of us.

I for one am taking my dancing shoes off and headed home to prepare.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.