Lear Capital: Budget Crash Point Coming Gold Ready To Soar

2010_01_05_17_53_260001Is debt about to drive our national budget to a Crash Point?  Since our shutdown showdown ended in mid-October, the budget deficit has soared some $160 billion.  When the showdown ended, it was called to our attention that the debt ceiling was extended but no one ever said by how much.  Guess we just had to extend it to find out.  Well it’s been less than a month and we’re finding out.  The budget deficit is rising faster than ever.  At this pace, the budget deficit would climb nearly $2 trillion dollars in this next fiscal year.

The Crash Point is what I refer to as the time when national revenues do not cover even the interest on our national debt.  Aside from this recent spike in the rate our debt is rising, we have been speeding to this point faster than anyone has imagined.  While the rhetoric suggests our national debt is currently near $17 trillion dollars, the real number is closer to $60 or $70 trillion when unfunded liabilities enter the equation.  Those debts include such things as Social Security, Medicare, Medicaid and Federal Pensions.

While the rhetoric also suggests these are down-the-road obligations, why is it then that the majority of our nation’s fixed expenses include these payments now?  The answer is simple.  These payments are essentially interest payments we are making on debts that are materializing every day as our country ages and more and more people move to retirement age.  That being the age where we get paid back for all the money withheld (borrowed) from our paychecks over the last 40 years or so.

They are called unfunded liabilities because the money they withheld isn’t really there.  But, the obligation to make the payments is.  Here are the current amounts we have to pay out of current revenues.  Don’t quote me on these, though, they are rising every second.  No one can write fast enough to keep up.  Social Security – $862 billion.  Medicare and Medicaid – $813 billion.  Federal Pensions – $229 billion.  And finally interest on $17 trillion of debt is $261 billion.

Added together you get about $2.164 trillion of payments made each year to cover these fixed obligations.  I say fixed, because they are not discretionary budget items.  Defense would be a discretionary budget item.  We can choose each year how much of our revenue will be dedicated to defense.  Welfare payments are also discretionary.  For example, at any time we could reduce our spending on food stamps.  Subsidies are another discretionary budget item.  If we so choose, we do not have to subsidize, oil, corn, milk, soybeans etc.  Foreign aid would be another discretionary item.  And finally, pork.  All these items are subject to budget scrutiny.  The aforementioned are not.

If we isolate just on the $2.164 trillion of fixed expenses, we begin to realize that our ability to afford our current budget is much more fragile than we are told.  Considering current tax revenues of $2.7 trillion (this also changes faster than I can write) we are just $536 billion dollars away from a crash point.  That being total revenues minus current fixed expenses.

Now we can do some math.  In the last five years Medicare payments have increased at about a 7.5% rate annually.  Social Security about 7%, Federal Pensions about 6%.  Interest on debt (at least the $17 trillion portion) has only risen about 2%.  That may sound good, considering our debt 5 years ago was only $10 trillion.  Keep in mind, however, the Fed has lowered interest rates over 90% since 2008 and has kept them artificially low via money printing.

Now if we do a little more math, we see that at the present rate of growth of our fixed payment obligations, within 5 years we hit $3 trillion of fixed liabilities.  When you chart growth of Revenue at about 2% a year, our revenues hit $3 trillion and collide with our fixed payment obligations within the same 5 year period.  That’s a crash point.

This all assumes, of course, that revenues will continue to grow, debt will stop rising and the rate baby boomers retire does not increase.  Well we all know debt is rising and has been at a rate of 6% a year.  That means interest on debt will rise faster than the 2% rate over the last 5 years.  Irrespective of a rise in the rate boomers retire, the crash point moves to 4 years.

Now you consider the number of baby boomers retiring is adding an exponential factor to the equation, and that the boomer expenses are the largest budget expenses, we could see the crash point move to just 2 years.  But don’t take my word for it, go to the national debt clock and do some figuring yourself.

Now there is just one wild card left.  Interest on the debt and rising interest rates.  Since 2008, the Fed has cut interest rates by over 90%.  This explains the anemic growth of actual debt expense since.  But, what happens if rates retrace 20% or 30%?  Interest on debt could double or even triple in a blink.  Then what?

Do that math and you can see how rising interest rates, piled on top of these other rising debt obligations put us perilously close to a crash point even as I write.  Now, some say interest rates never have to rise.  That is not true.  At some point, rates have to rise to entice investors to buy our bonds (lend us money).  Face it.  The pool of investors willing to buy our bonds is shrinking.  Were it not so, the Fed would not have to be buying treasuries every month just to keep our government funded.

What happens when we hit the crash point?  One of two things has to happen.  Either we default on debt or we keep printing money at an even faster rate.  Should it be the latter, inflation, even hyperinflation is inevitable.  There goes the value of all the dollars you have saved for retirement.  Should it be the former, and we get just one default on any payment, faith is immediately lost in the dollar and the dollar crashes and once again, there goes the value of your savings and retirement accounts.

Enter Gold and Silver.  The case for owning gold and silver in the face of so much debt is getting stronger by the minute.  But as always this is my opinion.  The numbers however, belong to all of us.  If you agree dare to follow me @DaveTheGoldDr.  If you think I am full of bullion follow some of the talking heads that tell you we have nothing to fear.

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