Skip to comments.How The U.S. National Debt Could Drain Your Savings
Posted on 01/11/2012 8:33:20 AM PST by blam
How the U.S. National Debt Could Drain Your Savings
January 9, 2012
By David Zeiler, Associate Editor, Money Morning
Now that Congress has allowed the U.S. national debt to grow bigger than the American economy, it won't be long until the American public suffers the consequences by losing most of its savings to inflation.
Figures for last year show the national debt officially exceeded 100% of the nation's gross domestic product (GDP). According to government figures, the national debt stood at $15.23 trillion at the close of 2011, compared to a GDP of $15.18 trillion.
"The 100% mark means that your entire debt is as big as everything you're producing in your country," Steve Bell of the Bipartisan Policy Center, told USA Today. "Clearly, that can't continue."
Government overspending has grown the federal debt at an alarming rate. As recently as 2010, the Congressional Budget Office (CBO) had projected this milestone would not be reached until 2020.
"Congress is doing everything it can to make sure the national debt grows," said Money Morning Capital Waves Strategist Shah Gilani. "Republicans want more tax breaks for the rich while they appease the middle class by considering extending the payroll tax cuts and unemployment benefits. The Democrats want to hire voters as government employees, a la Greece, to not only expand their base, but prove that big government can indeed be friendly. It's sickening."
According to projections in the latest budget submitted by U.S. President Barack Obama, the federal debt will soar to $26 trillion over the next 10 years. At that pace, the economy would need to grow at a 6% pace to stay even. The historical average for the annual GDP growth since 1948 is only 3.25%.
Unless Congress acts - and its recent track record of bickering while doing nothing to shrink annual budget deficits is not encouraging - this crushing debt will soon start inflicting serious pain on the American public.
Headed the Way of Italy and Spain
Although Congress could choose to tax its way out of debt, it would need to go far beyond the millionaires the Democrats want to tax. Fear of voter backlash will dissuade lawmakers from imposing the sort of taxes on the general public that could make a dent in the U.S. national debt.
Instead, Gilani sees the United States following the path of such troubled Eurozone countries as Italy and Spain.
"Greece, and more precisely Italy and Spain, are our ghosts of the future past," Gilani said. "The Fed will print more money. That's what they do. They work for the banks."
When countries print money to pay off debt, it typically leads to inflation. In such a scenario, the middle class loses big time as their savings lose value.
"The government's strategy appears to be some kind of "repression,' where you keep rates low and figure out a way of forcing domestic investors to take government bonds at very low interest rates," said Money Morning Global Investing Strategist Martin Hutchinson, noting that British bonds lost 90% of their value from 1945 to 1975.
"Repression's main effect is to solve government's problem at the expense of the middle class -- it's effectively a very nasty extra tax," Hutchinson said.
The Lessons of Weimar Germany
One extreme case of damaging inflation took place in the German Weimar Republic of 1920-1923. By 1921, prices were already 15-times what they had been in 1914 at the beginning of World War I.
What followed was a period of "hyperinflation" that in 1914 left the German mark worth only one-trillionth of its value.
"The Weimar hyperinflation wiped out the entire savings of the German middle class," Hutchinson said, noting that current U.S. policies of low interest rates, low taxes, deficit spending and an expansion of the money supply have mirrored those of the Weimar Republic.
"U.S. authorities probably won't pursue expansionary monetary policies with quite the dogged Germanic persistence that caused the mark to fall to one trillionth of its former value," Hutchinson said, "but the turnaround needed to stop a Weimar repetition will be very unpleasant, so there will undoubtedly be considerable denial and fudging of the figures as inflation begins to take off."
Although Congress can still prevent a national debt-induced disaster that would destroy much of the savings of the middle class, time is running out.
"Congress has until 2013 to start doing something, maybe through the first or second quarter of 2013 at most," said Gilani. "After that, if the world is growing and the U.S. is back on a growth trajectory, commodities will spike and inflation will start its inexorable, ineluctable rise."
There are several things investors can do to protect themselves from inflation. Hutchinson recommends:
Investing in Gold: Gold is still the best hedge against inflation. The SPDR Gold Trust ETF (NYSE: GLD) is a good option. Alternatively, you could go for a solid gold mining company such as Yamana Gold Inc. (NYSE: AUY). These tend to move somewhat independently of the gold price, but also become more valuable through earnings as the period of high gold prices lengthens. Investing in Silver: Try to work silver into your portfolio, as well - specifically the iShares Silver Trust (NYSE: SLV).
Investing in Asia: A third option is to invest in Asian stocks - especially South Korea and Singapore. Two strong prospects are the iShares MSCI Singapore Index Fund (NYSE: EWS) and the iShares MSCI Korea Index Fund (NYSE: EWY).
Fleeing the Dollar: With damage sure to be inflicted on the U.S. dollar, the Rydex Currency Shares Swiss Franc Trust (NYSE: FXF) also is a good choice. It tracks the performance of the Swiss franc and has an expense ratio of only 0.4%.
"Eventually, this thing is coming all the way down. Someday America will be such a horror show that it will be hard to believe that it is the same place that many of us grew up in."
When almost everyone is a parasite like the Democrat base, almost everyone will be Democrat.
I have read that the Weimar government deliberately devalued their own currency to get out of paying war reparations.
Is that accurate?
Europe’s Socialist Paradise has Eurozone Has $39 Trillion In Pension Liabilities - Almost 40x The ECB’s Balance Sheet!
This is our future.
Taxes will have to be raised or someone will have to be laid-off...something has to give.
Ron Paul is the only candidate who never voted to raise taxes nor voted to increase the debt limit - never.
Ron Paul’s budget plan would cut $1 Trillion from the Fed budget in year One.
$1 Trillion !
how did CA not make the top 10 ?
Deliberate inflation amounts to taxation by teleportation.
You have $1.
The feds “print”* $1.
The total quantity of currency has doubled, but the value it represents remains the same - thus halving the value of each of those dollars, and transporting $0.50 of value from you to the feds.
* - “printing money” is an anachronism. We now operate in large part on a “virtual currency”, whereby the Federal Reserve writes an arbitrary amount in the income column of its ledger, then loans that “money” to the government; from there on the “currency” is a chain of IOU debts which are strictly audited. Ergo, if the federal government wants another dollar, it just asks the Federal Reserve to write “+$2” in its income ledger, and after some computer time you lose $1 of savings value - to wit, taxation.
“Ron Pauls budget plan would cut $1 Trillion from the Fed budget in year One.”
Don’t get me wrong when I say this, the gov needs to be reigned in, but has anyone considered the impact massive cuts like that will have?
Inflation is the only way out of this fiscal mess for our leaders, short of war. Legal obligations must be satisfied ... but since those obligations are rendered in terms of “dollars”, the Federal Reserve can just conjure up more money and reduce the value those dollars were understood to represent.
Gold is OK for long-term high-density value storage, but impractical for common use during hard times. Certain popular forms of copper/brass/lead are more suitable for mundane needs.
Furthermore, I’d like to know the breakdown of this $1T in cuts, vis-a-vis military versus entitlements. How much of these cuts are in things in Art1Sect8, and how much in other areas that the federal (aka: national) govt is wasting money on?
People (especially Democrat politicians) always claim that big banks aren’t lending, but they are. They are loaning the Federal Government hundreds of $ billions. Obama’s deficits have sucked $ Trillions out of the private economy and will continue to do so until real spending cuts are enacted.
“Dont get me wrong when I say this, the gov needs to be reigned in, but has anyone considered the impact massive cuts like that will have?”
The pain will be difficult. No politician will support any meaningful reform until the illusion of free government spending is thoroughly clear. When the majority of voters finally understand the unsustainability of our current path, it may be too late. External forces will already be delivering the bitter pain. Democrats have convinced a large number of voters that the rich will be forced to pay for their benefits. Reductions in spending will be aimed at the military. Obama has a clever plan to dilute the immediate impact of military reductions with several large contracts to foreign governments.
We are in much worse shape than Europe. Europe has high taxes across the board especially with income taxes high on even low wage workers and a VAT and gas tax that increases the prices of almost every consumer good. Europe is starting to take the bitter medicine now. Democrats here just keep expanding the welfare state (student loans, Obamacare, food stamps, housing assistance, ...), sharply increasing regulations, and government control of the economy. Government employee unions have no intention to reduce their outrageous demands for retirement compensation. The unions have tremendous legal protections that place their benefits ahead of every other spending priority. Courts will support the unions and may make demands for increased spending in other areas such as eduation (see idiotic court decisions in Colorado and Washington state).
Yes. That’s why some consider an economic crash and mass civil unrest inevitable.
At present, about 20% of spending (not revenue, SPENDING) goes to each of Social Security, Health, Defense, Treasury, and Everything Else. We need to cut $1.5T just to break even. Treasury, being mostly debt service, is nigh unto untouchable: cut payments of debt interest and the whole system will collapse. That leaves cutting the other four categories by 54%, RIGHT NOW, just to stop the bleeding.
Like that’s gonna happen.
We can’t even convince Congress to reduce the rate of increase of spending from 6% down to 2.5% to match the average GDP growth - a mere 3.3% reduction in what Congress _wants_ to spend.
Slashing federal spending in half for everything but debt service would have a massive impact. The half of “taxpayers” who don’t would riot; 50,000,000 rioters would be, um, bad. Ain’t happenin’ since we can’t even get a handful more Republicans to grit their teeth and vote for a 3.3% spending cut.
Problem is, what’s the alternative? Hyperinflation may solve the problem of federal debt (the only non-war alternative once debt interest approaches 100% of revenue), but it would require equivalent increase in welfare (broadly defined) spending because the recipients expect to receive _value_, not just on-paper numbers. Inflate the currency 100% to cut the value of debts by 50%, but then (for example) the $2 needed to buy a loaf of bread will inflate to $4, requiring welfare payouts to double.
The only solution is CUTS. BIG CUTS. Even if we take Ron Paul’s shocking proposed $1T cut and reduce it to $0.1T over 10 years, we’re still increasing the debt by $7.5T over that period. We’d have to cut spending by 3.3% just to have any hope of paying down the debt _ever_ and Congress won’t do that. Heck, Ron Paul’s shocking proposed $1T cut STILL leaves a half-trillion-dollar annual deficit.
Yes, massive cuts would have enormous impact.
So will anything less than massive cuts.
To wit: hang on, it’s gonna be a bumpy ride.
Problem is, cutting $1T over 10 years means increasing the debt by $7.5T over the same period.
Not a solution.
Ron Paul is the only candidate who never voted to raise taxes nor voted to increase the debt limit - never.”””
That is correct.....but:
IMO, Ron Paul knew he was a lone wolf in such votes. He knew that his vote would be symbolism only. He also knew that he was running AGAIN for President.
While this makes his voting record seem legendary, I believe that he is tilting at windmills.
However, I also wish this country to stop spending money like a drunk who found a dropped bag of $100 bills.
We cannot keep sending moeny to enemies. We are funding the weapons which are used against us in the big picture, IMO.
Trouble with that & Ron Paul is that Ron Paul doesn’t see that we even HAVE enemies!!! He thinks that IF we all ‘play nice in the sandbox’, there will never be any problems on the playground. NOT!!!!
I absolutely like Newt’s & Perry’s idea of every country has to go back to ZERO in foreign aid & they have to tell us why we should be helping them.
North Korea spends most of it’s country wealth on it’s military —nuclear weapons—armaments of all kinds. It’s people are starving everywhere. There is no power sturcture to even try to build up industry for jobs or products in N Korea.
When this country attempts to get consessions in return for FOOD aid, their multi-generational crazies who are in charge call it ‘politicizing’. N Korea doesn’t have any kind of moral right to products of the USA. They ARE an enemy & I don’t think Ron Paul will ever admit that....along with the long list of others, including Iran-Syria-Pakistan-etc.
Wouldn't the removal of that much 'stimulus' in one year send us into an immediate depression?
We will probably lollygag around with a number of 'corrective schemes' but, inflation will be the final effective tool, IMO.
CD’s are paying .10 % inflation is raising 4%.
I have news for you, your savings are already being eaten up.
It's clear that education needs more money...look what's happening to our school kids.
Only a hateful, mean-spirited person would want to harm our children with cuts to education.
“Only a hateful, mean-spirited person would want to harm our children with cuts to education.”
Is this a serious comment? Even if it is serious, what does it have to do with courts ordering more spending? Do you understand the impact of labor cartel contracts on school budgets? Do you understand demands by government labor cartels for early retirement (pension, health care, and rehire after retirement) on school budgets?
The even worse news is that even if you’re wise enough to have your savings in the form of inflation-proof tangibles (like gold and silver) you’ll still suffer.
That’s because the feds will still think they’re entitled to taxes on the “gain” you enjoyed when you were really just preserving the value of your savings, and experienced no increase in wealth.
Most people here know me well enough to not mistake the sarcasm.
Parents should take their kids out of the cess-pool public school system...there is zero hope for repair of the system or the kids.
They'd better come with a metal detector and a shovel if they intend to tax the 'gains' on my precious metals.