Another election, another government that won’t be able to fix anything.
In 2007, the federal government came close to balancing its budget – the deficit that year was 161 billion. At that time the outstanding public debt (debt we have to service through interest payments) was 4.9 trillion dollars.
Fast forward through the insanity of 2008 through 2012. Now we have public debt equaling 11.4 trillion, and a budget deficit for the fiscal year of around 1.2 trillion.
Today we have two political parties, neither of which has a solution to above problem. If you turned the entire problem over to either party, they wouldn’t be able to fix it. Take for example the looming fiscal cliff which entails tax increases on the rich, middle class, and poor, including payroll taxes, income taxes, and investment taxes, from two different administrations (one democratic, one republican), and spending cuts in the systems both parties hold dear – entitlements and defense.
The total annual revenue generated by these changes – between 500 and 700 billion dollars. So even if we jump off the cliff, we still walk away with 500-700 billion dollar budget deficit.
One thing I think we can count on – neither party will let this happen. There is one thing these two groups can agree on, the best solution is to kick the can down the road some more.
So now let’s fast forward four years. 1.2 billion dollar annual deficits continue and the public debt continues to grow. At the current rate, we’ll add an additional ~3 trillion in serviceable debt, assuming we don’t hit another recession, which is entirely likely over the next four years. I’d say the odds are good we’ll add at least 4 trillion, give or take a few hundred billion.
So where are we in four years?
Serviceable debt increases to 15.4 trillion. The work force will have continued to decline thanks to the baby boomers hitting retirement. Social security continues to eat away more than it takes in. Medicare costs continue to rise around 6% each year… and the kicker –
The historical mean for serviceable debt in cases where FED interest rates aren’t zero bound is around 4%-5%, and the average maturity is around six years.
Under these conditions, we would see our debt service increase by around 500-600 billion. In 2007 our debt service was 250 billion.
If you go back to 2007 and add an additional 500-600 billion – we would have run a budget deficit between 650 and 750 billion dollars. This was under a republican president, with a democratic congress. Raising taxes on the rich doesn’t fix this. Lower defense spending by a few hundred billion doesn’t fix this. Cutting discretionary spending doesn’t fix this. Cutting entitlement spending doesn’t fix this.
The last congess had the chance to address this, it was called Bowles-Simpson, but nobody got behind the deal, including the current president. There’s no reason what so ever to expect a change of heart with a 2% popular vote split.
I don’t really know what will happen, but I’m not going to sit idly buy and hope for the best. You shouldn’t either.