IRA Contribution Deadline
Before we dive in, remember that the deadline for making 2010 IRA contributions is quickly approaching. The last day to make a contribution for 2010 is April 18. If you would like to make a contribution, please call your advisor.
Our Nation's Debt
Last week, we discussed "too much debt" in the context of consumer debt. Household debt is a near term problem. Government debt and deficits are a longer-term problem. Let's continue the conversation, borrowing from our research partners at Litman Gregory.
To prevent the credit crisis from becoming worse, the US government acted aggressively. Private sector debt became public sector debt. Government bailouts are funded from deficit spending and financed by borrowing from US, and foreign, lenders. Bailouts did not actually eliminate debt - they moved debt from one place to another.
Meanwhile, government stimulus spending added to our nation's indebtedness. The cost of the interest payments on this debt is a hidden tax on our economy. Debt payments reduce our long-term growth. Debt payments reduce our flexibility to respond to short-term cash-crunch situations, like our current military engagements, including Libya, or our desire to help our trading partners, like Japan.
Debt payments increase our risk and reduce our safety. If buyers of all this debt (including China) demand higher interest rates, either because market rates rise or because they are less confident in our ability to pay it back, our costs increase, our flexibility and our security decrease.
High debt levels hurt growth for other reasons. Some suggest that increased government borrowing leads to lower private sector investing and spending. Historical data shows that the negative impact on growth makes the problem worse because tax receipts drop in a slower growth economy, and raising taxes slows growth even further.
As bad as the current federal debt situation is, it may get significantly worse in coming decades if growth in entitlement spending continues on the current path. Such spending, mainly social security and Medicare/Medicaid, is on a growth trajectory that could eventually swallow up most of the federal budget. The political decisions that must be made to address the issue will be unpopular and this increases uncertainty.
We hope we can reduce this debt over time. If we can't or won't face the problem, we face very serious negative consequences: lenders may not continue to finance our borrowing, we may see a weakened currency and higher inflation. One way or the other, we are going to pay for our spending in the form of reduced growth.
On a relative basis, reduced growth is the necessary result of high debt payments. Without the debt payment, the US Government would have one of 3 (nice) situations:
1) more social programs, more money to spend on military engagements, more money for anything our elected officials chose to spend it on, or
2) a surplus, or
3) lower tax rates. (1)
