The National Debt and the Annual Budget Deficit

As I am writing this, a northern flicker is hammering away on our fireplace flue. The sound echoes throughout the house like a jackhammer. It is illegal to shoot flickers within the city limits of Westminster where we live. So how do you solve this problem? We put seed in the bird feeder to feed the beast. The jackhammer is like a dinner bell. The bird is essentially saying, “Hey, I know you have food in there, gimme some.” The wild birds have become accustomed to getting fed by the local homeowners with bird feeders. Okay.. okay.. guilty as charged. We have domesticated the wild avians.

The governments hammer away at the marketplace because we have domesticated them too. There is a certain expectation that regardless of how governing entities operate, the revenue generating public will always comply and “put out more seed” in the form of more and more taxes and larger and larger purchases of existing and new government debt. The economy is growing nicely right now; yet the amount of overspending of our governing entities continues to grow faster than the economy can sustain long-term. So, for now, we continue to borrow and spend at an unsustainable rate.

I took a break to stop the jackhammering……yes I put out seed in the feeder. At some point, I am going to run out of the ability to buy seed. The flickers might turn my house into a pincushion (unless Westminster changes the rules on bb guns) or they might revert to being wild birds and get their seed from natural sources.

On a state or local level, we are already seeing changes to address their financing problems. For example, the Public Employees Retirement Association (PERA) is starting the complicated process of bringing its finances in line with the realities of our workforce in the state. They are grappling with reducing benefits and raising taxes to make the retirement fund sustainable. At some point, in my view, many other governing entities will also be forced to address the issue.

I also believe it is likely that the U.S. government is on a path to eliminating the debt ceiling entirely and putting our nation on an unlimited amount of spending and borrowing. At some point, unless the issue is dealt with in a responsible manner, accumulated debt will reach a point where lenders will be unwilling to loan vast amounts of money every year.

Currently, money for new debts and continued cash for existing loans already on the books rollover as the notes come due. Historically these refunding processes are a mere formality; paying off old debt by issuing new debt. This will continue until financial markets begin to resist funding and begin to require more and more interest on the debt as well. If we reach that point, our system will change. Taxes will go up, and benefits will be reduced. Without change, the eventual outcome is inevitable. (However, it is not knowable when this might begin to occur.) One of our research methods is to review every treasury debt auction for performance. As part of our research process, we are continuously watching for stress in the treasury system.

The current outlook suggests that the political flickers will hammer away until they realize there is no more natural seed available. Then they will be forced to resort to living “in the wild”. They will be forced to look for a more sustainable method of governing. To close on an optimistic note, perhaps a generation of leadership in the future can find a solution to the problem.

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