The Looming National Debt Crisis for The U.S.

The U.S. national debt is $12 trillion.  With a population of 307 million people, each person’s share of the national debt is approximately $39,000.  If the U.S. runs an annual budget deficit of $1 trillion annually, the national debt accumulates at about $3 billion per day.  Is this all the government owes?  No, the government also owes social security based on unfunded promises, and owes promised medical care to those over age 65 under Medicare.  The estimated total value of promises made in the social security system is approximately $100 trillion if the system stopped today, nothing new were paid in, and everyone was paid off what they have been promised.  Medicare is estimated to be six times larger based on future projections of medical costs for the elderly assuming no changes to the system.  Of course, these systems do not have to pay all of the future obligations today.  However, those promises do need to be funded somehow, and each new participant in Social Security and Medicare represents on a life-span basis additional costs not additional revenue. not work that way.  The size of our annual economy in terms of total good and services produced (GDP) is about $15 trillion.  Accordingly, the deficit is about 6.6% of our annual GDP, not counting unfunded federal promises.  There are also unfunded state and local promises that about double the total unfunded promises.

There are additional government obligations as well, like the Pension Benefit Guaranty Corporation with a $35 billion deficit (small by comparison because it is only in the billions).  A proposed health care bill would add trillions to the unfunded promises.  

How does the U.S. escape this debt bubble?  Taxation will not work well.  What about taxing the rich?  If the government taxed away every penny of anyone earning more than $75,000, it would raise just $4 trillion, and that is approximately 70-80% of all taxpayers. There is very little tax revenue below $75,000.  What about confiscating wealth like Stalin did with the kulaks?  In the first year after forced confiscations, the government actually does get richer because it has transfered valuable property to itself, but immediately thereafter most property diminishes in value because of the threat of confiscations and the reduction in buyers.  Furthermore, the incentives on building wealth and productive property are eliminated so in confiscatory regimes there is always economic deterioration.  The current case is Venezuela where nationalization of industries has destroyed productive capacity and incentives.  If it weren’t for oil revenues from exports, Venezuela’s economy would have shrunk by 1/3 to 1/2 of its size five years go by many estimates.

What are the likely outcomes if immediate action is not taken to address America’s fiscal irresponsibility?  Most likely is that there will be a national debt crisis where there are just no buyers for U.S. debt.  Currently, exporting countries are buying government bonds, but at some point in the near future, that will change.  It is likely that one morning, a major foreign government or bank will announce that is no longer buying U.S. debt.  The market for the U.S. debt is likely to panic, and cause an exit of buyers.  Just like occurred in 2008 for corporate debt — there were literally no buyers.  

As the U.S. dollar slowly devalues, holding fixed rate U.S. debt becomes less and less attractive.  Paying a dollar for two dollars 30 years from now is not such a good deal if that dollar in 30 years is worth only 25 cents in today’s dollars.  Accordingly, just printing more dollars to pay down the U.S. debt is not a long-term solution.   

The best solution is fiscal discipline, and that the U.S. legislators have been incapable of fiscal discipline for the last three decades.  The price of profligacy will have to be paid at some point, and with current policies it will be paid in terms of a massive national debt crisis.