Debt. And More Debt.

I have been thinking about debt lately.

We have a lot of debt, both as a nation and as individual consumers. Does it matter? Yeah, probably it does. Our current situation as a nation is unprecedented historically. During the 1990s, debt held by the public had risen to nearly 50% of GDP in the early 1990s, but fell to 39% of GDP by the end of the decade. The public debt burden fell, due in part to decreased military spending after the Cold War, 1990, 1993 and 1997 budget deals, gridlock between White House and Congress, and increased tax revenue resulting from the Dot-com bubble. The budget controls instituted in the 1990s, successfully restrained fiscal action by the Congress and the President and together with economic growth contributed to the budget surpluses that materialized by the end of the decade. These surpluses led to a decline in the debt held by the public, and from fiscal years 1998 through 2001, the debt-to-GDP measure declined from about 43 percent to about 33 percent. Sweet.

Debt relative to GDP then rose due to recessions and policy decisions in the early 21st century. From 2000 to 2008, debt held by the public rose from 35% to 40%, and to 62% by the end of fiscal year 2010. During the presidency of George W. Bush, the gross public debt increased from $5.7 trillion in January 2001 to $10.7 trillion by December 2008, due in part to the Bush tax cuts and increased military spending caused by the wars in the Middle East. Under President Barack Obama, the debt increased from $10.7 trillion in 2008 to $15.5 trillion by February 2012, caused mainly by decreased tax revenue due to the late-2000s recession and stimulus spending.

The total, or gross national debt, is the sum of the “debt held by the public” and “intragovernmental” debt. As of February 2012, the “debt held by the public” was $10.7 trillion and the “intragovernmental debt” was $4.8 trillion, for a total of $15.8 trillion.

The national debt can also be classified into marketable or non-marketable securities. As of February 2011, total marketable securities were $9.0 trillion while the non-marketable securities were $5.2 trillion. Most of the marketable securities are Treasury notes, bills, and bonds held by investors and governments globally. The non-marketable securities are mainly the “government account series” owed to certain government trust funds such as the Social Security Trust Fund, which represented $2.5 trillion in 2010.Other large intragovernmental holders include the Federal Housing Administration, the Federal Savings and Loan Corporation’s Resolution Fund and the Federal Hospital Insurance Trust Fund (Medicare).

Notice that the major debt culprit going forward is not social security nor medicare, but rather the net interest we will owe on our debt.

And, not to totally freak you out, but the U.S. government is obligated under current law to mandatory payments for programs such as Medicare, Medicaid and Social Security. The GAO projects that payouts for these programs will significantly exceed tax revenues over the next 75 years. The Medicare Part A (hospital insurance) payouts already exceed program tax revenues, and social security payouts exceeded payroll taxes in fiscal 2010. These deficits require funding from other tax sources or borrowing.

The present value of these deficits or unfunded obligations is an estimated $45.8 trillion. This is the amount that would have to be set aside during 2012 so that the principal and interest would pay for the unfunded obligations through 2084. Approximately $7.7 trillion relates to Social Security, while $38.2 trillion relates to Medicare and Medicaid. In other words, health care programs will require nearly five times the level of funding than Social Security. Adding this to the national debt and other federal obligations would bring total obligations to nearly $62 trillion. However, these unfunded obligations are not counted in the national debt.

Forget the math. That’s a lot of debt!

If we look back at history, we will find that we have never carried this much total debt to GDP and we may now be standing in the middle of the biggest credit bubble in history … and, it does not include the impending student loan bubble of $1.2 trillion. Current total credit market debt (including consumer debt) stands at more than 340% of total Gross Domestic Product (GDP). Not so sweet.

This only happened once before, and that was precedent to what we call The Great Depression. Following 1929, debt rose rapidly in comparison to GDP, because we continued to borrow but failed to produce much. Sort of like, now.

With the exception of the Great Depression, our country always held less than 200% of our GDP in debt. We only started getting crazy with debt since the mid-1980s (perhaps coincident with a sense of a personal indulgence that really got crazy during the 80s, but that is another post)and as a result, the current experiment with debt is really only about 27 years old. From a historical perspective, it’s like only this morning. So, my point is that we haven’t been here before. And, the future should remain pretty uncertain.

The other thing that is interesting about debt from a macro-view is that it is based on the assumption that the future will always be bigger than the past. That is to say, we will produce more in the future than we have in the past and thus we will always be able to pay off future debt. That is the way we hold our student loans, our mortgage loans, our auto loans and our credit card debt. Our next job will pay more than our last job. Our GDP will always keep growing. We will always be able to borrow as much as we want by printing treasury notes, and our creditors will always be willing to take on more debt. Similarly, when we need a loan to consolidate out-of-control debt, we just go to a bank. Well, not so much now.

But in the last 4 years, we saw what happened to many of those beliefs when we discovered that some of the underlying assumptions didn’t turn out to be so good. Most of us are stuck now with whatever loans we were able to take out, and with whatever interest rates we are paying, because the consumer credit markets are frozen.

That does not mean we shouldn’t believe that our government won’t figure out a way to remain solvent through un-expected twists in the road ahead. There is ample evidence to suggest that it will, but it is also hard not to believe that the next 15-25 years might be pretty different than the past 27 years.

What becomes of our old reliable consumer credit machine when banks won’t give credit cards to anyone with a late payment history? What happens to the housing market when the only people who can qualify for a mortgage loan have 800+ credit scores and at least 20% down in original cash? What happens to the under-banked, who only carry a $1,500 balance in their checking accounts and a single bank product, causing the banks to lose $70/year on each of their “class”. If the banks continue to winnow out the costly low-end checking customers, and return to the old banking dictum that the only people who are qualified to borrow are those who don’t need the money, there are 60 million Americans who will be affected in the form of checking accounts they can’t afford, credit cards for which they can’t qualify and mortgages that they can’t get.

What do you think happens to the economy?

We already know that wages have been flat for the last 12 years – that’s right, no real wage increase in today’s dollars over the year 2000. While at the same time, inflation has averaged around 3% per year since the year 2000. You may have noticed some changes at the gas pump ($1.45 avg. price per gallon in 2000 in California, while much cheaper in the rest of the nation), and price increases at the grocery store (2000 – 2010):

Fruits/Vegetables            46%

Coffee                                  29%

Milk                                       19%

Poultry                                 19%

Beef                                      46%

Pork                                       37%

Flour                                      57%

Inflation? Congress says no. They obviously don’t shop for food or gas. I won’t even go to heating oil. You get the point.

Unless something happens soon to reverse the frozen credit markets, the broken capital markets, the failure of our government to re-train those who are now well into their second year of receiving unemployment benefits, our inability to pass meaningful legislation that can help create actual jobs for people and loans for small businesses, then I think the upward climb will only get steeper. Regardless of who gets elected in the fall. Remember, through all of this, the Federal government is not stopping borrowing and cannot stop spending. And, the little guy will continue to get screwed.

Now, this would be the perfect moment to promote the iPeopleFINANCE lending model, but I won’t.

We care about all of this deeply and we are committed to doing something about it when we launch in September.

In the meantime, try to keep your powder dry and your credit clean, and work out what you can with your creditors, so you can minimize the impact on your credit history. Try to pay your bills on time. Keep your seat belts fastened, and don’t give up. There are lots of entrepreneurs working hard right now to solve big chunks of this problem. Help is on the way. But, it ain’t coming from Congress.

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About Steve King

iPeopleFINANCE™ Chief Operating Officer. Former CEO of Endymion Systems, Inc. a $36m Information Systems Services company. Co-founder of the Cambridge Systems Group, the creator of ACF2, the leading IBM Mainframe Data Center Security product; acquired by Computer Associates. IBM, seeCommerce, marchFIRST, Connectandsell alumni. UC Berkeley alumni. View all posts by Steve King

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