Two Questions to Ponder

I want to give you two quick things to think about:

1.  When will we ever fix our problems?

Here are two common arguments I hear:

Argument A: If we raise taxes now or if we cut government spending, it could lead to another recession.  So, we can’t act now.  We need to get the economy on firm ground before we make those changes.

Argument B: We have to give people time to adjust before we cut Social Security (or Medicare) or any other benefit that they receive.

So, my question is…when do you think that we’ll feel that the economy is so strong that our politicians will say, “now is a great time to balance our budget”?  When will we address our long-term structural problems?  Shouldn’t we be deciding on these changes right now and locking them in – so that we can start to adjust our behavior for the future?

2.  Could we afford for interest rates to return to their prior levels?  The math does not work out for interest rates to ever increase.  Let me take you through some numbers (realize that we standardize all numbers by comparing them to GDP):

Our total debt (including what we owe to the Social Security “trust fund”) = $16 trillion.

Our GDP is also approximately = $16 trillion.

So, we say our debt = GDP  (or we say debt = 100% of GDP)

Tax revenue for the past 50 years has been = 18% of GDP  (on an annual basis)

From 1988 – 2007, five-year U.S. Treasuries had an average interest rate = 5.72%

If interest rates returned to this level, interest expense would = 5.72% of GDP.

Spending 5.72% of GDP on interest expense, when we take in tax revenue that is = to 18% of GDP doesn’t work.  That’s almost 1/3 of our tax revenue just being used to pay interest.

Do you think that the Fed thinks this is sustainable?  Absolutely not.

I’ll write more about this problem in the near future…

Have a great week.

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