How did a nation as powerful and successful as the U.S. get itself into such a profound existential predicament? It’s not as if we had no warnings —the Founding Fathers knew that every great society has collapsed when it overextended itself financially. And they warned us.
I refer here to the absolutely irresponsible actions of elected politicians to run so many U.S. record budget deficits that our country is now buried with a $38 trillion debt. It is the talk of Wall Street. The nation’s total federal debt, held by the public plus intragovernmental holdings, has now reached 123% of Gross Domestic Product. And the debt has mounted so high that our interest costs now exceed the entire military and defense budget. This debt is a bar tab we will be paying off for a long time, if ever. Each person’s share of the federal debt is $118,750.
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The short answer to the question above is that the U.S. did not reach the mark of shame, $38 trillion, overnight. We are seeing the cumulative result of decades of poor policy choices, spendthrift politicians, economic shifts, the welfare state, wars, and structural imbalances.
For one thing, almost every year since the 1970s, the federal government has spent more than it collected in taxes. The U.S. has run a budget deficit nearly every year, and each year’s deficits accumulate to form the national debt. There have only been a few surpluses in the last century. Social Security, Medicare, and Medicaid automatically grow as healthcare costs rise and the population ages. These programs are considered “untouchable,” but they consume over 50% of federal spending. Along the way, the U.S. lost its last remaining Triple-A credit rating.
The 2008 financial crisis and the more recent pandemic triggered big spending, adding trillions to the nation’s debt, and interest payments have ballooned; the government now pays hundreds of billions annually for interest, on its way to exceeding $1 trillion per year by the end of this decade..
Both political parties have expanded government spending, but the giveaways and overspending on social welfare by Democrats make them the greater villains. Liberal politicians win elections by offering benefits and creating new programs, especially in the area of healthcare and “free stuff”.
Congress is also a culprit, passing temporary spending measures but avoiding tough long-term fiscal reforms. In plain terms, the U.S. hasn’t gone broke because it can “print” money or, more accurately, electronically create more and more dollars. What’s happened is that Uncle Sam has borrowed its way to prosperity, security, and political comfort for decades. But that borrowing habit is now coming home to roost, as we have reached the point where servicing the debt itself is one of the biggest expenses in the federal budget.
There will be no happy ending to this terrible mess, which will spread to other nations. This view is not a view of the coming year or two. These comments are not meant to alarm you, but for planning purposes. Eventually, we will most likely reach The Great Reset, a kind of global reset, essentially a debt train wreck expected in the late 2020s. Sayeth economist John Maulding about the process, “it won’t just be another recession or even a depression. It will be a true, world-shaking, generational crisis. We can expect to see political and social upheaval. There will be winners and losers. The capstone: All that debt will be brought to the market, rebalanced, and the market will ‘clear’ at some new valuation. All asset prices (and every debt is someone’s asset) will reset.”
It isn’t easy to forecast the path The Great Reset will take. There is no reason for dramatic lifestyle changes at this point, but you can prepare. The good news is that the crisis most likely will give way to a period of healing, accompanied by an era of general prosperity. When it is over, we’ll find a much better world waiting for us, says Mauldin: “A time unprecedented in human history, when life will improve in ways we can barely imagine right now.” Getting there will be the tricky part.
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