Sacrificing Future Spending

Financial sacrifices are so obvious and commonplace they are seldom acknowledged.

Borrowing money on a credit card, mortgage or car loan to purchase something is typical. You have sacrificed future spending for use in the present.

1)   If the purchase, financed by debt, increases income more than the cost of debt service, the required principal plus interest can be repaid from future income. This is probably good.

2)   But if the purchase is consumed, future income is not increased and future discretionary spending must be decreased. Consumption examples: food, energy, transportation, housing, medical care, televisions, and so many more. Probably bad.

3)   One hundred years ago purchases made with debt were less common. Today we buy groceries, gasoline and almost everything with a credit card. Those purchases burden future income streams and reduce future discretionary expenditures.

So What?

It should be obvious that encumbering future revenue streams will reduce purchases in the future unless overall debt is increased (forever) or income expands to offset the required debt service.

Test this against most governmental actions and policies:

·         Do government expenditures increase future revenue?

·         Did any wars pay for their costs? What was their return on investment?

·         Did expenditures for government employees (salaries, medical costs, pensions) add to government revenues?

·         Did Representatives and Senators sufficiently benefit government revenues and the economy (through their wise management and policies) to justify expenditures for their salaries, medical cost, staff, pensions, junkets and payoffs?

·         How much does government revenue increase due to the SNAP program (food stamps) and other social programs?

Many people believe governments spend far too much, add to unpayable debt, encumber future revenues, and do not increase revenues sufficiently to justify their expenditures.

To keep this obviously flawed system working, total debt must increase every year, debt service increases forever, and people must pretend a mathematically flawed system will survive.

Central banks assist the delusion. They buy sovereign debt (by the trillions), push interest rates lower to reduce debt service expenditures (lowered to multi-decade or multi-century lows) and increase their balance sheets (code for “money printing”) to “stimulate” the economy.

And The Consequences Are

·         U.S. national debt exceeds $20 trillion and unfunded liabilities are $100 to $200 trillion more.

·         Global debt exceeds $230 trillion and increases rapidly.

·         Interest rates are low (though moving higher since mid-2016) but still negative in many European countries.

·         The many trillions of “printed currency units” created by central banks levitated global stock and bond markets. The excess liquidity went into stocks, bonds, corporate debt, student loan debt, consumer debt, reduced yields, and boosted the wealth of the 1%, especially the wealth of 0.01%.

·         Annual interest payments made by the U.S. government to bond holders has increased to about half a trillion dollars. It will increase further. Questions: How rapidly will it increase and how much will it damage the economy?

What Was Sacrificed By Central Bank Policies?

·         Savers, insurance companies and pension funds. Also, small businesses, the poor and middle class, indebted students, and consumers whose expenses increased faster than wages.

·         Your “high yield” checking account probably pays less than 0.1% annually, insurance companies raise premiums to compensate for lower earnings from Treasury debt, and U.S. pension plans are underfunded by $1 - $5 trillion, depending on who is counting and investment assumptions. 

The Reality Of The Situation

·         The U.S. government owes over $20 trillion in official debt and has committed far more in future payouts. These debts will not be paid in dollars with current value. Dollars must be devalued further, as they have been every decade since 1913, or … the debts will default.

·         Massive government, corporate and consumer debts have committed a huge portion of future incomes for debt service. Fewer resources will be available for future spending.

Examine These Graphs:

U.S. Government official national debt: Debt cannot increase forever, so a reset must occur. Before the reset occurs, expect rapidly increasing debt, devalued dollars, higher cost of living, and possible credit crunch, stock market closures, and hyper-inflation.

U.S. government annual expenses: Expenses have increased from less than $1 trillion in 1985 to over $4 trillion today. Revenues have not kept pace with expenditures, so debt increased.

U.S. government annual interest paid: Thanks to the 35 year bull market in bonds which forced yields lower (until mid-2016) interest expenses have increased slowly to about half a trillion dollars each year. We know that Congress will not reduce spending, debt can only increase, and interest rates are rising. All three point to larger payments each year to pay interest on astronomical levels of debt.

Half a trillion per year of interest can easily grow to a trillion or two per year. Normal interest rates are perhaps 6% to 10% for U.S. government debt. Is 10% per year high enough given that the debt will be repaid with deeply devalued dollars, and, dare we say it, the U.S. Ponzi financing scheme is increasingly risky and insolvent. Current official debt will grow at its typical rate of about 9% per year to over $30 trillion in five years. Interest payments on $30 trillion at 8% are $2.4 trillion per year, up from half a trillion per year. This will be a problem.

One might ask if continuing a mathematically unsustainable system is wise.

So What?

1)   Debt increases every year. Congress will not change this process.

2)   Interest payments will rapidly increase in coming years.

3)   The U.S. government ADDS more debt each year to pay half a trillion dollars in interest. Obviously it cannot afford the current exceptionally low interest rates and certainly cannot afford higher rates.

4)   If interest rates cannot rise due to budget constraints, then central banks must increase bond purchases (increase balance sheets by “printing”) to fund government expenditures and cap rates.

5)   But when central banks “print” new dollars, yen, euros and pounds, those newly created currency units accelerate the decline in purchasing power.

Which Will The U.S. Choose?

·         SACRIFICE THE DOLLAR?

·         OR BALANCE THE BUDGET?

·         OR SACRIFICE THE STOCK AND BOND MARKETS AND THE ECONOMY?

·         To maintain low interest rates central banks must (continue to) “print” a huge quantity of fiat currency units and buy sovereign debt. Those new currency units devalue all existing currency units. Higher consumer prices are coming.

·         Or, balance the budget, pay down debt, return to sound money, honest accounting, and … really? Even a politician couldn’t speak those words without smiling at their absurdity.

·         Or, allow interest rates to rise, tank the bond markets, bankrupt millions of businesses and individuals, crash the economy, and watch the stock markets fall off a cliff. Not their preferred scenario…

I expect the dollar will be sacrificed!

Purchasing power will decline, consumer prices will rise, and already cranky consumers will get angry. Politicians will “do something” and probably make the plight of the middle class, the poor, and indebted students worse. BUT the economy will remain good for the political and financial elite.

Alternatives exist that will protect your savings, retirement, and purchasing power from devalued currency units and higher consumer prices.

Gold and silver and Miles Franklin at 1-800-822-8080 come to mind.

Gary Christenson