Friday, February 16, 2018

How Did America Go Bankrupt? Slowly, At First, Then All At Once!!!

The US federal debt has again been on the move, as of mid-week up to a fresh record of $20.7 trillion.  But, really, without some sort of reference point, what does that mean?

Typically, the metrics of total debt or federal debt divided by GDP (Gross Domestic Product or the total value of goods produced and services provided in the US annually) are used (chart below).  Still, that's a bit ethereal to most folks.

So, I thought I'd make this simpler.  The chart below shows federal debt (red line) versus total full time employees (blue line) since 1970.  Clearly, debt has surged since 2000 and particularly since 2008 versus full time jobs.  The number of full time employees is critical as, generally speaking, only these jobs offer the means to be a home buyer or build savings and wealth...part time employment generally offers only subsistence level earnings.

But if we look at the change over those periods highlighted in the chart above, we get a clear picture (chart below).  Full time jobs are being added at a rapidly declining rate while federal debt is surging in the absence of the growth of full time employees.

And if we look at the federal debt added per full time job added (chart below)...broken arrow...broken arrow!!!  That is $1.92 million dollars in new federal debt per net new full time employee since 2008.  Compare that to the $30 thousand per net new full time employee from '70 to '80...or $140 thousand from '80 to '90...and nearly quadruples the $460 thousand per from '00 to '08.  Despite a far larger total population and after ten years of "recovery" since '08, this is likely as good as it gets.  We are likely at or very near the top of this economic cycle.  This pattern is likely to carry forward over the next decade and economic cycle...likely with disastrous results.

The red line in the chart below shows federal debt divided by all those employed full time in America.   The green line shows the disposable personal income (what remains after taxation) divided by those same full time employees.
If you are employed full time, as about 127 million Americans are, each of you owe $163 thousand dollars (above and beyond the taxes you are already paying) to square up America's accounts.  And to gauge your capability to do so, I take total disposable personal income (what remains after taxation from all sources of personal income) and divide by the same 127 million full time employees...on average you each take home $115 thousand dollars (despite the fact that the median household income in America is about $60 thousand...yes, the top earners are skewing the average just a tad bit higher)?!?

Curious how things got so out of hand?  The 3+ decades of Federal Reserve interest rate cuts making debt ever cheaper and encouraging Congress (as well as corporations and individuals) to spend ever more absent the willingness to tax the populace for it. 

The chart below shows debt to GDP versus US population growth from the nations onset.  More broadly, US population growth has been decelerating since 1790 when the combination of a relatively small population, high immigration, and high birth rates meant annual population growth in excess of 3%.  Over time, as the population grew, immigration slowed, and birth rates collapsed; US population growth tumbled.  Since 1950 total annual population growth (black line in chart below) has decelerated almost 75% (from 2% to 0.6%) but more critically the annual population growth among the under 65 year old population has essentially ceased (as the yellow line in the chart shows).  Massive interest rate cuts to incent debt creation have been substituted for the decelerating organic growth.
The last chart shows how many months of disposable personal income it would take for all those working full time to pay off the debt.  As the chart below shows, if America were intent on settling its affairs, it would now take 18 months of collecting all income (every cent above and beyond all taxation already being collected) from America's full time employees.

Now this administration (like its predecessors) is intent on running large deficits again thanks to tax cuts coupled with fast increasing non-discretionary spending alongside large spending increases on infrastructure and the military.  Of course, America can never technically go "bankrupt" as it can, is, and will continue to digitally print however much "money" is necessary to pay the bills.  But this results in an ever shrinking minority with the spoils and an ever enlarging majority left to pay the price for this policy of ever increasing debt.

The minority asset owning class with the vast majority of stocks, bonds, and real estate will continue to be rewarded from the ongoing debt creation.  Those considered "blue collar" or "working class" will continue to find their rents are higher, their insurance premiums rising, their children's debt incurred to get an education going through the roof...and their incomes inadequate to acquire the fast rising assets...sadly the vast majority will continue to fall further behind (detailed HERE).