To pay the Federal debt over 30 years, you must double your mortgage and increase your taxes 50%

Here’s a simple way to personalize the problem we’re in Federal debt-wise.

Double your housing payment, increase your tax bill by 50%, and that’s the cost of paying down the debt over 30 years and of balancing the budget.

Or said another way — buy a second house, just like the first.  Or rent an apartment, just like the one you have now.  Give it to the government, but keep the mortgage and rent payments for yourself.  Let’s do it in math notation:

2 x housing = federal debt payoff.   1.5 x tax = federal deficit balancing.

Here’s the detail:

The Statistical Abstract of the United States is a great thing, paid by our taxes, and an addition to the Federal debt every year.  It tells me there are 113m households in the United States in 2005.

Wikipedia is also a great thing.  It is not paid by our taxes and adds nothing to the Federal debt.  In fact, it pays taxes and reduces our debt.  It tells me that the average household has an income of $46,324 dollars per year in 2005 , has a mortgage that averages $167,000 and a median mortgage payment monthly of $1,295.  That’s a 30 year mortgage. Renters pay a median $728 per month.  To be fair, Wikipedia got the information from the US Census, another deficit contributor.  A rough estimate is that the average housing costs for a household are about $1,000 per month in the United States.

The federal debt next year will be over $15 trillion, or about $132,000 per household.  A 30 year “mortgage”on that amount at 8% rates yields a monthly payment of $968 (using http://www.mortgagecalculator.com, also not increasing the Federal debt).  That’s about what housing costs are.

So, Reduce the debt over 30 years = double your housing cost.

(if you’re nitpicking, you’ll realize I haven’t considered corporate tax.  Let me make the simplifying assumption that big tax increases to corporations are going to flow down to you in terms of higher product costs and lower wages.  So there.)

On to the yearly deficit.  In an earlier post, I did a quick analysis that showed that the Federal government is spending 50% more than it’s making — and that cost side budget reductions are hard (think about killing medicare, medicaid and social security and you are in the ballpark of what needs to be cut).  So it comes down to tax increases, and to balance the budget would increase tax rates by 50%.

So, reduce the deficit = 1.5 x your taxes.

Here’s the problem.  For the average household, housing costs are nearly 25% of household income, and federal taxes are 6% of household income (reprinted here from the Tax Policy Institute.  They’re a non-profit, so they don’t add to the Federal debt but they don’t pay taxes, either).  Under the “Debt Payment Plan” outlined here, the average household would go from 6% average federal tax rate to 34% average federal tax rate.  Heck, it’s only a 6x increase!

If you make twice the median income, expect your bill to grow to 70% of your income for taxes and housing.  But hey, you make twice the median income, so suck it up.

A 6x increase in taxes for no increase in services is political suicide, but it is in fact the unavoidable size of the problem.  The longer we wait, the harder this is going to be.  It’s like ignoring that funny shaped mole until it turns into life threatening cancer.

This is unavoidable, folks, unless there are drastic cuts in services or we default on our debt (oddsmakers, also known as stock markets, put the probability of default at 6%).

And defaulting on debt will make the Great Depression look like “those awkward years.”  Or picture the US as Zimbabwe:

the Federal Reserve could unleash the Zimbabwe option and repudiate the national debt indirectly through hyperinflation, rather than have the Treasury repudiate it directly.

Sweet! Hyperinflation.  A wheelbarrow of greenbacks for a loaf of bread, political destabilization like 1930s Germany.  But great news if you have a fixed rate mortgage, as $167,000 ends up being equal to a tank of gasoline. Of course, your life savings will also be equal to a tank of gasoline.

If you didn’t have that foresight to buy a house, then that $167,000 house with two years of 1,000% inflation will cost only $167 billion.  Welcome to 1989 Brazil.

Get. Pissed. Off. Now.

Greece vs. USA — the economic smackdown

I recently blogged comparing the Greek economic meltdown to the US and its high debt levels.  There’s more reason to worry.  First, this widely reported trend in December:

U.S. data show that China reduced its holding of Treasury bills in December by $34.2-billion (U.S.) – a 4.3-per-cent decline – which pushed it into second place behind Japan as the largest foreign holder of U.S. debt.

Quoted from the “Globe and Mail”.  When your largest customer (for debt, but still a customer) China decides to buy less product, that makes it harder to sell US debt.

And then this from Moody’s, the debt rating agency:

The U.S. could lose its triple-A [debt] rating in 2013 if the countries [sic] grow slows, interest rates climb and if the government fails to address the national deficit. . .

Cailleteau added that “now the question of a potential downgrade of the U.S. is not inconceivable.”

Ack.  A downgrade.  Aside from being a blow to our ego, the primary impact of a downgrade is that selling debt becomes more expensive.  That’s because the risk of default is deemed higher.

Today, the United States T-bill is one of the safe havens for cash.  Everyone wants to put there money in T-bills when times are tough.  For instance, in the economic collapse of 2008, the T-Bill interest rate went to 0%.  That means that investors wanted security so much that they would put their money in US debt just so that they could get it back intact later.  No quest for profit, returns, or higher interest in previously secure things like bank’s Certificates of Deposit.

If the US is downgraded, it loses that safe haven status, and the impact of a downgrade on interest rates could be larger than on another country.  More risky + less demand = even higher costs to sell debt.

So if borrowing gets more expensive, is that a disaster?  Or just another blip that no one will remember?

Well, also according to Moody’s, the interest to revenue ratio of the US government should rise to somewhere between 12% and 18% by 2012, before a potential downgrade.  That means for every $100 the US receives in taxes, it’s spending $12 to $18 in interest on the debt.  That’s like those crazy credit card rates that Congress  just tried to outlaw.

With a downgrade, interest costs could rise even more.  For every 1% point change in interest rates (100 basis points for those of you that are financially minded), there is a 5% increase in current interest (again, 500 basis points).  If a downgrade increases rates by 100 basis points, then current interest on the debt could move from the Moody range of 12% to 18% into the 17% to 23% range.

Interest on the debt is fighting to be the single largest “program” in the federal government.  A “program” in the same way that Alcoholics Anonymous is a program.  “I’m Uncle Sam, and I’ve got a money spending problem”.

Let’s put US interest expenses in budget context.  The 2009 budget of the US, in percent, looks like this:

• Defense budget – 23%
• Social Security – 20%
• Medicare and Medicaid – 19%
• Other Mandatory spending – 17%

That’s 79% of the Federal budget so far.  And those items, btw, already exceed Federal revenue.  With just those, we’re out of cash.

We have to print more money, and incur more debt and higher current interest, to do things like inspect our food, regulate medicines, inspect and secure airplanes and airports, move the mail, prevent flag burning, regulate consumer credit card rates, and hold hearings on steroids in baseball.  Basically, most of the things you think of when you think of the Federal government.

Now, if interest on the debt rises to 21% of the budget after a downgrade of our AAA rating, what shall we cut?  Make it big, because a little nip and tuck will not make this old girl look young and attractive again.  We need some major surgery.

It’s easy to find a protester for protecting our health care programs.  It’s easy to find a protester against defense spending.  It’s really really hard to find the same irate citizens about the federal debt and its interest.  It’s just as big a budget item as social security.  Where is the outrage?

The Tea Party movement?  They may be the closest we’ve got, but the Tea Party movement doesn’t count.  Named after the Boston Tea Party, one can only assume, which protested “taxation without representation”.  That doesn’t seem to fit a bankruptcy protest, which might be more thought of as “spending by representation” or even “not enough taxation by representation”.

The Tea Party movement seems to be more widely upset than single issue protesters, anyway.  The recent convention had breakout sessions that included “Why Christians Must Engage”, “5 Easy Fixes to Mass Immigration” and “Emergency Preparedness” in addition to “US Bankruptcy, Facts and Figures”.  From the Tea Party Nation Website:

We believe in Limited Government, Free Speech, the 2nd Amendment [the right to keep and bear arms], our Military, Secure Borders and our Country!

Is this, then, the way democracy ends?  Do we just spend ourselves into disaster?  Refuse the bad tasting medicine that would make us healthy?  Fiddle while Rome burns?

Oh, if you haven’t noticed, Rome was once the center of civilization.  It hasn’t recovered in 1,500 years.

Greece: is the US next

This is simple.  Greece has a debt to GDP ratio of 135%.  The US has a debt to GDP ratio of 94%.  Greece has a deficit to GDP ratio of 13.5%.  The US has a deficit to GDP ratio of 10%.

Greece is bankrupt, threatening the European Union.  At what level does US debt mean that no one will lend to the US?  At that moment, the US will be bankrupt.

If you answered “it will never happen”, consider:

• there was a time when people believed that real estate would only go up.
• there was a time when people believed that internet stocks would only go up.
• The debt to GDP ratio is higher than at any time in US history aside from 1946 and 1947, just after completely shifting the US economy to a war footing paid by the US government
• The US debt to GDP ratio will go from 94% to over 100% over the next two years.

The chart of debt to GDP looks like a global warming carbon chart

Predictions from the CBO show the debt to GDP ratio growing to more than 200% sometime between 2035 and 2065.  At that point, pretty much any country that refuses to grant us debt would put us into bankruptcy.  The good news, I guess, is that the US is “too big to fail”.  A US bankruptcy would lead to a worldwide depression and other countries won’t like that.

The bad news is, we’re in uncharted territory.  What will other countries demand in exchange for allowing us to maintain this profligacy?

The other bad news is that solving a budget deficit is hard.  We’re currently spending about 50% more than we make.  That’s not like cutting out desserts to lose weight or reducing the number of shopping sprees to save money.  That’s moving to a different house, selling the car, and eating ramen noodles.  The average growth rate of the GDP, about 3%, is less than the anticipated annual growth of the federal budget.  Thus, we can’t grow ourselves out of this problem.  We’re in a hole but, by god, we’re going to keep digging.

Freezing spending in line with President Obama’s State of the Union 2010 speech also won’t help.  It only addresses 17% of the federal budget.  That’s not the equivalent of “moving to a different house and selling the car”.  Nope, that requires some drastic steps that we don’t want to take.

Like immediately raising the Social Security eligibility age to something like 75. Sound scary?  Doesn’t even come close to solving the problem.

Scary solution # 1.   Social Security, Medicaid, and Medicare are the three largest programs in the federal budget.  They account for about 30% of the total budget of the US Federal government.  Eliminating all three programs, immediately, completely abandoning seniors and the poor, while still charging all the taxes intended for the programs — social security withholding tax, payroll taxes and the like — would still not bring the US budget into balance. That’s how far away from fiscal prudence we are.   Eliminate the entire defense budget, and we finally get back in balance.  (might want to start learning some foreign languages, though, since who knows what would happen with just the boy scouts and police as national defense).

Scary solution # 2.  If Federal expenses are 50% more than Federal income, that implies that tax rates need to be 50% higher to maintain the current level of spending.  That’s right.  Look up your personal tax bill from last year.  Now multiply by 1.5x.  That’s what it would take to quit adding to the Federal debt.  That doesn’t even start to pay it down, mind you, that just keeps it from accelerating like a pre-recall Toyota Camry.  So maybe the Federal government won’t have to move to a new house in this scenario, but you just might.  With a median Federal tax rate of just less than 20%, this scary solution means the government is taking, for the average wage earner, 10% more of your wages.  You go from working one day a week for the federal government to working 1.5 days a week for Uncle Sam.  Hey, that’s not so bad — communists work 5 days a week for the government.  Of course, they get free housing, a car (if you’re well-connected) and a telephone line after just a 2 year wait!