Point #1 … I'm old enough to remember President Gerald Ford holding a press conference in 1974 or so regarding the proposed budget deficit. With a large chart and a pointer—and because of the serious recession the nation was in—he sheepishly informed the American people that the budget deficit that year would be around $40 billion … a truly scary figure at that time …
… we now run a deficit of that size every nine days
Point #2 … If your household income is $60,000 annually, but you spend $100,000 annually, life is good. You are enjoying nice dinners out and entertainment and vacations and perhaps a new boat or RV. You are running up credit cards or getting new loans to make up the $40,000 difference.
If the following year you earn $65,000, but spent $110,000, life is still good. You are living far above your means and borrowing that extra $45,000 to break even. You also have those annoying interest and principal payments on the first $40,000 loan.
The pattern can continue for a number of years, until various lenders deny you new sources of credit, or require much higher interest rates to obtain the funds needed. Those interest and principal payments on the debt accumulated have also become a major pain …
… at some point, your house of cards comes tumbling down.
The first point is intended to show just how irresponsible the federal government has become in regard to spending money it doesn't have. The projected budget deficit this year of more than $1,600,000,000,000 follows deficits averaging $1.4 trillion over the two prior years. Government projections still show deficits of nearly $1 trillion annually over the next 10 years.
This year's budget deficit equals $4,400,000,000 EVERY DAY … $182,000,000 EVERY HOUR … $3,000,000 EVERY MINUTE!
The second point illustrates the dangerous game the Administration and the Congress are playing now in regard to our rising dependence upon those willing to buy our debt obligations … U.S. Treasury bills, notes, and bonds … to finance government out of control.
Our interest cost already exceeds $200,000,000,000 annually, or $550 million each day. Note that this cost is in an environment of historically low interest rates. The U.S. Government can borrow money for three months or six months at annual interest rates of less than 0.15%. Borrowing for two or five years? Annual interest cost of roughly 0.65% and 2.10%, respectively. Borrowing more money for 10 or 30 years? Annual interest costs of roughly 3.40% and 4.50%, respectively.
What about when borrowing costs move to more traditional levels? What about when the Chinese, the Japanese, the Saudis, global insurance companies and retirement funds, etc. say enough is enough? No more purchases of U.S. Treasury securities!
What then? The Government's borrowing costs will rise sharply, pushing annual budget deficits sharply higher as well.
Forecasting economists agree that current budget deficits are unsustainable … that we must eventually get a grip on government spending. The economists disagree as to when such efforts must bear fruit.
Some suggest that spending must be trimmed immediately or that taxes must be raised immediately. Others suggest that we must create a viable, meaningful, dependable plan to slow the growth rate of government spending soon, to be implemented over the next few years and decades.
We must slow the future growth rate of entitlement programs … Social Security, Medicare, and Medicaid. But mandatory decisions needed in coming weeks would primarily impact these programs in future years and decades, with little impact this year or in 2012 or '13 or'14.
That's OK. In fact, that is desirable. Long-term adjustments to these programs … slowing the future growth rate of spending on these programs … provides current retirees with confidence that very little will change.
Retirees in coming decades would be aware that spending in these programs would grow more slowly than under current legislation. Retirement ages for full Social Security benefits can be moved from age 67 for younger workers now to age 68 or 69 … to take place in 40, 50, or 60 years!
We made a similar change in the early 1980s, when the age for full Social Security benefits was stretched over coming decades from 65 to 66 and soon to 67. For the first time, we could also look at a modest move toward means testing for full benefits.
It is highly annoying to watch members of the U.S. Congress from both sides play childish games. The Congress just extended the ability of government to pay its bills for another three weeks, until April 8. This follows shorter extensions a few weeks earlier.
Get Serious! Work together! Act like Adults!
There is some hope. The Senate's bi-partisan "Gang of Six" has used the wise recommendations of the President's own Deficit Reduction Commission to draft legislation to get us back on a sane spending path.
In addition, a total of 64 members of the Senate … 32 from each party … wrote the President last week, urging him to take the lead in approaching our financial tsunami. His job is supposed to be that of leadership.
I continue to hope that serious bi-partisan efforts to slow the future growth rate of entitlement programs … forget the phrase "cutting spending" … can be engineered. Perhaps in coming weeks unified Republicans will use the required extension of the debt ceiling (our ability to borrow even more money) as the ticket to get agreement from the Democrats. I continue to hope that the President will embrace those efforts.
The Threat to America
In my view, the greatest threat to this country is internal … not external. It is refusing to get government spending under control. It is refusing to see the financial damage we do every month, every year to our children and grandchildren, as we dump higher and higher levels of debt upon them.
As noted frequently, we can step up to the plate and make much needed changes on our time table. The alternative is another financial crisis, this one tied to the U.S. government's inability to borrow more money to cover deficits … or be able to borrow that money at reasonable rates of interest.
Without getting a handle on spending we become just another Greece, another Ireland … a list that could soon include Spain and/or Portugal. We could have more financially stable nations and perhaps the International Monetary Fund impose spending restraint upon us … tell us where we must cut spending … and where we must raise taxes …
… how sad for America
Jeff Thredgold is chief economist for Zions Bank and founder of Thredgold Economic Associates, a professional speaking and economic consulting firm. Visit www.thredgold.com.