Sunday, December 28, 2014

Taking the National Debt Personally - How Do You Plan to Pay Your Share?

This article is directed towards US citizens because it deals with the enormous debt overhang that the US now has to deal with in the future. But any country with large debt to GDP problems could apply this article to their situation. Here we will try to take a complicated subject and simplify it in a way that perhaps the average person can relate to. 

When we hear about trillions in debt, it seems like something detached from our daily lives. We know it exists, but so far no one has asked us to pay it off. In fact, lenders seem willing to keep funding whatever amounts we want to borrow. Let's take the actual numbers and make them personal to try and bring the topic more into the real world for "we the people".


For this article we will use the National Debt Clock (numbers as of the day this article was written) as the factual basis for the numbers we will look at. Instead of looking at the giant national number, we will break it down on a very personal level and ask: How much do you owe? and How do plan to pay for your share? We will try to keep it is as simple as possible.

Question: How much do you as a US citizen owe for your part of the national debt?

Answer: As of right now the National Debt clock says you owe $56,401 as your share.

Question: Is that all I owe right now?

Answer: No, you also owe whatever your personal private debt is (home, auto, credit cards, etc) . As of today the average per citizen is another $52,317.

Question: That doesn't sound too bad. If I pay that off over time in the future am I out of debt?

Answer: No, unfortunately you have promised to help out with the payment of social security and medicare forever into the future. Those programs are building up debt faster and faster, so your share of what is owed to pay for that will actually get much higher in the future even if you paid off what you already owe now. 

Question: How much am I on the hook for with these future obligations?

Answer:  As of right now your share of that is a little over $363,000. But that amount is still growing and continues to grow faster than what you are paying off. 

Question: How do you plan to pay off your share?

Answer: That sounds impossible to pay off. I will never make enough money to pay all that off. I have to eat you know. By the way I am only 5 years old. How do you expect me to come up with all that money? My Dad can't pay off his share so how is he going to pay for mine?

That's a fair point. Really, we can only expect that people who have an income and pay taxes could make payments on their share of all this debt. So let's relook at the numbers using the share of debt for each person who could actually make any payments on it (taxpayers).

Current debt per taxpayer: $154,000 

Share of future unfunded future promises (social security & medicare) per taxpayer: $989,000

Share of private personal debt per taxpayer: $142,000

Total share of all projected debt per taxpayer:  $1,285,000

So I will ask you the question again now: How do you plan to pay your share?

Say what? I am not in the 1%. I can't pay off my share if I give everything I make for the rest of my life since my share just keeps getting bigger faster than my income goes up. I can't even pay what I already owe now. How do you expect me to ever pay all this off?

Answer: No one does. These numbers show you on a personal level why everyone who understands the situation knows that the present system is unsustainable. For now, you can keep getting by because people will continue to let you borrow at very low interest rates so you can keep making a "minimum payment" on your share. That is all you are doing. You are not even paying off your existing balance due. Your minimum payment is just keeping your total balance due from growing quite as fast. Meanwhile, your future debt obligations are growing rapidly, even as you cannot even pay off what you already owe today. 

The point is, from a pure math standpoint, this cannot go on forever. No one knows how much longer it can go on, but at some point something has to give to get rid of or reduce the debt you cannot repay and will never be able to repay. According to the debt clock, your share of all future projected debt exceeds the total of all your assets and is growing faster than your assets (the very definition of insolvency)If interest rates on your debt start going up, the day you can no longer borrow what you need will arrive even sooner. It will probably arrive for sure when your minimum payment you are making only covers the interest on all the debt you owe (if not before).

Question: Why are people still lending me money?

Answer:  Because if they stop you will immediately be unable to make even the minimum payment. This will cause the entire system to collapse quickly. Your lenders prefer to keep you afloat for now because they are not ready for the major changes required to the system to deal with your default. So for now, they will continue to restructure your debt and loan you enough to continue to make your minimum payments. This may continue for awhile longer, but not forever.

Concluding comments: 

The point of this exercise was not to depress you. The point is to convince you that the issues we are covering here on this blog are serious. At some point major change is going to happen because it has to. The present system cannot be sustained long term. It may be able to hang on longer than you would expect because change is painful and will be put off as long as possible. But change is coming at some point. How that change takes place and when is going to impact everyone one way or another. That is really the most important point to keep in mind.

Your debt will eventually have to be dealt with. Either by outright default or by devaluing the US dollar (inflation) so that you can continue to make debt payments using more dollars that are worth less. Also, it may be that some of your future promises to pay for social security and medicare will get cut, but that decision will set off a wave of civil unrest from those who are counting on you to pay for it.

There is no easy way out now. Your debt is already too big and growing too fast. Change is coming some day in the future. What the average person needs to do is stay informed and be ready to adapt to whatever form the change takes. Understanding the issues is the first key step. Having a plan in mind to deal with change is the next step.

Added note: 

A question I get here is how can the average person prepare for change given that so many different future scenarios are possible? On January 1st 2015 I will have an in depth article that talks about this. It will give the history for why this blog was started, what it hopes to do, and offer some common sense ideas that anyone should be able to use to prepare for whatever happens. This article will also be provided as a Google document in Word format so that it can be easily printed and given to anyone interested. Of course it will be free to anyone who can use it. Please do hand it out to anyone you think can use it.

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