Home About Archives RSS Feed

The Retired Investor: America Is Living Beyond Its Means

By Bill SchmickiBerkshires columnist
The U.S. government has been borrowing from Peter to pay Paul for decades. That should come as no surprise to most, but the speed by which we are piling up debt to support our spending has become alarming.
The federal budget deficit is the difference between how much Washington spends and how much it receives in taxes. That concept should be familiar to all of us who count on our income to support our family's spending. Imagine if the amount you owed (your deficit) doubled from last year.
That is what happened to the nation's budget deficit over the last year, to the tune of $1.7 trillion.
If you look at the big picture, the U.S. total federal debt topped $33 trillion this year. That amounts to 121 percent of 2022's GDP. Usually, the U.S. deficit expands during hard times for the economy since tax receipts fall. The opposite occurs when the economy grows. However, that relationship has come apart.
The U.S. economy has been growing since the pandemic and yet tax receipts continue to fall. Much of the blame for this situation can be laid at the doorstep of various administrations and Congress. Tax cuts by George W. Bush, Barack Obama, and more recently Donald Trump have reduced the amount of taxes coming into the government's coffers.
In typical political fashion, the present White House under President Biden has pinned the blame for lower tax revenues on the former president. Trump indeed left the country in far worse shape than his predecessors. His more than generous corporate tax cuts failed to jump-start the economy. Instead of investing in capital formation, corporations used those savings to increase dividends and stock buybacks.
Federal spending now accounts for 25 percent of GDP. In defense of government spending, you might say the last few years have been unusual and you would be right. The COVID-19 pandemic triggered a huge spending program to save the economy and voters. In addition, the need to do something about the country's deteriorating infrastructure was finally addressed after years of inaction. Since then, Russia's invasion of Ukraine and the terrorist attack in Israel have added even more pressure to increase spending.
But the really big programs that have consumed so much of the government's spending commitments are Social Security and Medicare, which account for almost half of U.S. spending. As more Americans retire, the costs of these programs will continue to escalate. As such, deficits without tax increases are expected to climb.
Back in 2011, the Congressional Budget Office (CBO) predicted the fiscal deficit would average 1.8 percent of the economy in the ensuing decade. This past May, in the CBO's latest projections, that number has increased to 6.1 percent of Gross Domestic Product. Altogether, federal spending will account for almost 25 percent of the U.S. GDP over the next decade while tax receipts will account for 18 percent of GDP. If we continue this trend, Penn Wharton School researchers predict that the U.S. could default on its debt as soon as 20 years.
Up until now, the financial markets have largely ignored the deficit, and the endless debates and false promises by legislatures who talk a good game but simply move the deck chairs around on a sinking ship once they are in power. The bond market, however, is beginning to take notice.
As the nation's borrowing grows larger to finance a growing deficit, bond vigilantes are taking matters into their own hands. They are selling U.S. government bonds, which is pushing yields higher and higher on government debt. It is the private sector's response to Washington's profligate spending and irresponsible deficits. The result is that the credit markets are shifting long-term interest rates higher making it more and more expensive for Washington to continue spending and borrowing.
The government is now facing the reality of spending much more in interest payments on our ballooning debt than ever before. In the current fiscal year interest spending should surpass $800 billion, which is more than double 2021's $325 billion number.
By 2026 net interest expense should reach 3.3 percent of GDP. That would be the highest on record. If interest rates remain where they are, and fiscal policy continues its spending path. If unchecked, the cost of servicing this debt could be larger than defense spending by 2025, and top Medicare spending by 2026. 
I believe the present push by Republicans in Congress to cut spending is both necessary and urgent. It will be painful. It should also be accompanied by tax increases across the board, but that may be too much to ask for given elections next year, but one can always hope.

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.

Anyone seeking individualized investment advice should contact a qualified investment adviser. None of the information presented in this article is intended to be and should not be construed as an endorsement of OPI, Inc. or a solicitation to become a client of OPI. The reader should not assume that any strategies or specific investments discussed are employed, bought, sold, or held by OPI. Investments in securities are not insured, protected, or guaranteed and may result in loss of income and/or principal. This communication may include opinions and forward-looking statements, and we can give no assurance that such beliefs and expectations will prove to be correct. Investments in securities are not insured, protected, or guaranteed and may result in loss of income and/or principal. This communication may include opinions and forward-looking statements, and we can give no assurance that such beliefs and expectations will prove to be correct.



Support Local News

We show up at hurricanes, budget meetings, high school games, accidents, fires and community events. We show up at celebrations and tragedies and everything in between. We show up so our readers can learn about pivotal events that affect their communities and their lives.

How important is local news to you? You can support independent, unbiased journalism and help iBerkshires grow for as a little as the cost of a cup of coffee a week.

News Headlines
Lanesborough Planning Board Mulls Town Meeting Proposals
Zonta Club of Berkshire County Offers Scholarship
Bard College at Simon's Rock to Screen '20 Days in Mariupol'
Williamstown Decides to Clear Out Water Street Lot
Berkshire Communities Impacted By National Cellular Outages
Pittsfield Man Sentenced on Child Sexual Assault Charges
Clark Art Lecture on Littoral Law
Dalton Police Department Budgets for a Detective Position
Berkshire Nonprofits See Housing, Recruitment as Critical Needs
Marie's North Street Eatery Cuts Ribbon in Pittsfield

@theMarket (475)
Independent Investor (451)
Retired Investor (180)
February 2024 (5)
February 2023 (2)
January 2024 (8)
December 2023 (9)
November 2023 (5)
October 2023 (7)
September 2023 (8)
August 2023 (7)
July 2023 (7)
June 2023 (8)
May 2023 (8)
April 2023 (8)
March 2023 (8)
Congress Stock Market Markets Metals Europe Deficit Stimulus Crisis Selloff Oil Pullback Japan Debt Taxes Banking Election Bailout Jobs Commodities Debt Ceiling Greece Federal Reserve Retirement Interest Rates Stocks Currency Euro Recession Banks Europe Rally Fiscal Cliff Energy Employment Economy
Popular Entries:
The Independent Investor: Don't Fight the Fed
Independent Investor: Europe's Banking Crisis
@theMarket: Let the Good Times Roll
The Independent Investor: Japan — The Sun Is Beginning to Rise
Independent Investor: Enough Already!
@theMarket: Let Silver Be A Lesson
Independent Investor: What To Expect After a Waterfall Decline
@theMarket: One Down, One to Go
@theMarket: 707 Days
The Independent Investor: And Now For That Deficit
Recent Entries:
The Retired Investor: Auto Insurance Premiums Keep Rising
@theMarket: Melt-up in Markets Fueled by Momentum
The Retired Investor: Electric Vehicles Hit a Speed Bump
@theMarket: Jobs Jump But the Fed Disappoints
The Retired Investor: Economics According to Trump Supporters Part II
@theMarket: Economic Data Buoys Market Gains
The Retired Investor: Economics According to Trump Supporters
@theMarket: Is January's Action Preview of the Year Ahead for Stocks?
The Retired Investor: Stanley Cup Joins Long List of Fads
@theMarket: Market Volatility Rules the Day