Is it a problem, a necessity, both or neither?
During the last presidential election, there was a lot of talk about the national debt spiraling out of control. Then-candidate Trump suggested that the national debt could be paid off completely in 8 years, although he said that would not necessarily be his goal.
So, what is the national debt and should investors worry about it? Not surprisingly, it’s challenging to get people to agree on the number, but let’s examine what it is and do our best to get an estimate.
If you spend more money than you make, you are in debt. When the federal government spends more money than it collects, it is in debt. It really is that simple.
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Let’s put it in historical perspective – the US has not been debt free since 1835, when President Andrew Jackson decided to pay off the $75 million debt of all the states by selling land in the western part of the US and blocking every spending bill he could. So, on January 8, 1835, the US was debt free.
It lasted just one year.
The US Department of the Treasury updates the national debt every day and as of May 2017, the Treasury reported the national debt to be approximately $19.8 trillion.
Senator Ben Sasse, Republican from Nebraska, on the other hand, recently made headlines when he said the real number is more like $70-$75 trillion because there are other liabilities – he calls them entitlements – that are not included in the $19 trillion number.
Most economists agree, however, the $19 trillion is more appropriate because Senator Sasse’s number extends to programs that may or may not happen.
So, assuming the official debt of the United States government is $19.8 trillion, this amounts to:
There is a big difference between how the US Government presents its finances and how a publicly traded company presents its finances. Specifically, publically traded companies are required to account for explicit and implicit future obligations – the US Government is not. But what if the US Government was held to the same standards? The results would be more frightening
According to research group JustFacts, our federal government had about $84.3 trillion in “debts, liabilities, and unfunded obligations” at the close of its 2016 fiscal year. Shockingly, this $84.3 trillion shortfall is 93% of the combined net worth of all households and nonprofit organizations in the US.
The Journal of Economic Perspectives published a white-paper aimed at determining the economic consequences of government debt. Using thousands of data points on government debt and economic growth rates from 20 developed economies from 1800-2009, the authors found that that countries with national debts above 90% of GDP averaged 34% less real annual economic growth than when their debts were below 90%.
Here is where we are:
The average US household has outstanding mortgage debt of more than $168,000. Average household incomes, on the other hand, are about $55,000. So, the typical household’s debt/income ratio is more than 300%.
As a financial advisor, do I lose sleep over the national debt? Not really. I do, however, lose sleep over these other debt statistics:
We may not be able to directly control the size of the national debt, but we can absolutely help our next generation control the burden of their student debt with thoughtful planning.
Please call me so we can discuss.