Archive | May, 2010

Fixing Docs, But Not Fixing Our $13 Trillion Debt Crisis

Posted on 26 May 2010

This week, our national debt is projected to pass $13 trillion (Want to know how big a trillion dollars is? Click here).

It’s a timely week for the debt to have its Bar Mitzvah, because there’s a debate raging anew about the health care law and whether it actually reduces the federal budget deficit. The public is still having difficulty squaring the circle where $2.3 trillion in new spending helps reduce our $13 trillion debt.

But it’s an important question to answer – perhaps the most important question to answer. As recently as this week, rating agencies like Moody’s have warned that the trajectory of our debt has us on course for a downgrade in our bond rating.  If that happens, the interest rates we pay will rise, which means higher taxes to service the debt, along with more expensive mortgages and bigger credit card bills.

So there’s good reason to be concerned about government health care and the debt.

The Congressional Budget Office (CBO), analyzing the new health care law, projected deficit reduction in the order of $120 billion over the next decade. As CBO director Doug Elmendorf pointed out, however, these projections were only as good as Congress’ word. A mere two months later, Congress is already poised to break it.

If a planned 21 percent decrease in Medicare doctors’ reimbursements doesn’t take place, then the CBO estimates about the health care bill and deficit reduction aren’t worth the paper they’re printed on. And the American Jobs and Closing Tax Loopholes Act (HR 4213) – expected on both the House and the Senate floors this week – will delay that spending cut until 2013, at a cost to taxpayers of $64 billion.

Since this is an adjustment to policy that’s already in place (Gimmick Alert!), Congress doesn’t have to account for this spending under its Pay-As-You-Go rules.

Congress isn’t even living paycheck-to-paycheck; they’re borrowing money at a record-breaking pace. Our lenders remain willing to finance our spending today, but we are utterly dependent on their continued confidence. And the day international investors decide that the US is headed for a Greek-style financial crisis, they’ll be right.

Ignore The Debt and Pay The Price…With Interest

Posted on 21 May 2010

What would you do if the monthly payment on your home mortgage jumped from $1,100 a month one year to over $1,400 the next? Keep this in mind when you hear prominent economists and opinion makers talk about higher interest rates as a consequence of our $13 trillion debt.

If we continue to accumulate debt, those who lend us money—both American investors, as well as foreign countries like China and Saudi Arabia—will demand higher interest rates to compensate for the greater risk of loaning money to the US.

But don’t be fooled into thinking that higher interest rates only affect power-players in New York City and Washington, DC. Anyone that holds a home mortgage, a student loan, or even a small credit card balance will be affected by this, because the size of your monthly payments is directly impacted by the interest rate.

Here’s how: Imagine you’re purchasing your first home with a mortgage for $200,000. Your interest rate is 5 percent this year, but it adjusts upward after the first few years. That 5 percent interest rate is “indexed,” often to the interest rate on Treasury securities – the federal government’s debt. This means that the interest rate on your mortgage rises and falls with the interest rate on government bonds.

At 5 percent interest, your mortgage payment is reasonable — just under $1,100 a month.

However, while you’re enjoying that new house, Congress is spending its way to an additional $1.4 trillion in debt. That’s on top of the $13 trillion we already owe. When our lenders demand higher interest rates in response, and the rate on your mortgage jumps to 8 percent, your future payments would look a lot different.

At 8 percent, your payments would increase by $330; if the rate jumps again, to 12 percent, you’d be paying an additional $560 (Think that’s impossible? Remember – in 1981, the yearly interest on a fixed rate 30-year mortgage was over 18 percent!)

Not only will the payments go through the roof, but over the life of the loan—let’s say 30 years—the total cost of your $200,000 house at a steady 5% is about $386,000. That’s not chump change – but on a mortgage where the rate rises to 10% you’d be paying $541,000. That’s $155,000 more – almost enough to buy another house!

Keep this in mind the next time you see a debt clock that features your share of the national debt. The debt is very real, and the consequences of doing nothing – like higher interest rates – will have an impact on all us.

Image courtesy of swisscan.

Don’t Promise What You Can’t Spend

Posted on 20 May 2010

The US government has a long history of promising more than it can afford to spend. As you can see in the graph above, in all but four of the last thirty years, our government has spent more money than it’s received in taxes. In this, we’re not unique – many other countries have been piling on national debts of their own.

But in the last two weeks, a few of our debt-ridden brethren started to fight back:

  • First, Greece enacted a fiscal austerity package that included substantial cuts to public sector salaries and pensions. As you might have heard, civil servants in Greece didn’t take the news lightly. Instead, they rioted in the streets, setting cars on fire and throwing Molotov cocktails at police.

Though cutting the pay of public sector workers isn’t a panacea, it’s significant because it recognizes the disconnect between spending that’s been promised – either to public employees, or taxpayers in general – and what’s actually available in the government’s checkbook.

Washington still doesn’t get this. The national debt is approaching $13 trillion, and as our debt builds, so do our interest payments. By 2018, close to one-fifth of the money the government brings in will be consumed by our $755 billion interest payment. That’s a big problem, and not just because Congress will have to raise your taxes to pay the bill.

Moody’s – the same agency that spooked Spain into cutting public sector salaries – considers interest payments that large to be in bond downgrade territory. If Treasury bonds are downgraded, interest rates will rise, which means that everyone – from students, to homeowners, to casual credit card users – will see their monthly bills increase.

The good news is that projected future spending is still just that – a projection. Congress can follow the lead of countries like Spain, and preemptively make unpopular decisions to rein in promised spending; or, they can follow the lead of Greece, and have those decisions forced upon us.

Image courtesy of Patrick Q.

The nation’s checkbook: $561 trillion short?

Posted on 20 May 2010

Last week, the green eyeshades at Moody’s warned Spain that their stellar AAA credit ranking was at risk, citing the country’s difficulty in meeting deficit reduction targets. Spain’s spooked creditors responded by demanding higher interest rates to hold the country’s bonds.

These interest rates are bad news, and not just because Spain’s minimum monthly payment on their national credit card just got a bit bigger. It also means the Spanish could soon see their mortgage payments and credit card bills rise (click here to find out how).

Unfortunately, a new report from the Congressional Budget Office (CBO) shows that the United States is on track for a similar outcome.

Moody’s has drawn a “line in the sand” for advanced countries with large debt loads; interest payments on their debt can’t exceed 18 percent of all the money they’re bringing in through taxes. You cross the line, and you risk a downgrade – it’s as simple as that.

CBO projects that the United States will cross that line in eight years.

Unfortunately, if we don’t get our fiscal house in order, that first bond downgrade won’t be our last.  As the graph of CBO data above shows, over the next 70 years our public debt is projected to skyrocket to more than 800 percent of the country’s economic output – that’s $561 trillion (you can find out how big a trillion is here).

Continued debt accumulation in the coming decades means higher taxes, and higher interest rates that drive up the cost for all of us to borrow money.  Unless you expect to check out from planet Earth within the next ten years, you should be frightened. We are on course not only to destroy your family’s finances, but also to destroy our country’s.

So, what lies behind this astronomical growth in the national debt? Entitlement spending. Reining it in is the only solution. Unfortunately, the CBO says that Congress’ new health care law won’t fix this problem; many economists believe that it will make the problem worse.

As one chair of the President’s deficit commission recently made clear, defeating the debt will require difficult and substantial entitlement spending cuts. Unless we want to end up on the wrong end of a Moody’s report, Congress must act soon.

The Debt Is No Laughing Matter, Jay Leno.

Posted on 14 May 2010

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Jay Leno took a minute on The Tonight Show to suggest that perhaps the United States shouldn’t be borrowing money it can’t pay back.

The joke may be funny, but the reality of our debt to foreign countries is far less so. China’s share of the US debt has more than doubled in the last five years, and the US Treasury recently reported that China holds $894.8 billion of government debt — about 10 percent of all our publically held debt.

Continued deficit spending leaves Americans no choice but to pay a large portion of our taxes to foreign governments, like China, Russia, Iran, and Saudi Arabia – countries who don’t have the US’ best interests in mind.