The current economic "boom" is deceptive. It's still all about debt.

I'm very grateful to the economic policies of the present Administration for improving the outlook for so many Americans.  There are millions more jobs available, some of the worst excesses of the previous Administration have been halted or reversed, and a lot of us have more hope for the future.

Unfortunately, the improvements so far haven't begun to touch the real problem, one that dates back to the 1950's and 1960's.  America began to live by debt in those years, and never stopped.  As more and more debt was needed to fund greater and greater government expenditure, so the ratio of income to expenditure, and income to debt, continued to get worse.

This is how the situation has progressed from the 1960's to today.

We would like to introduce you to Sam and his finances. Currently, Sam does well for himself, earning $100,000 a year. Sam loves the good life, and to maintain it he consistently spends more than he earns. To fund this continual budget shortfall, he borrows money. The graph below shows his rising income (green) and accumulating debts (red) since 1966.  [Click the image for a larger view.]

Unfortunately, Sam is not a hypothetical person. Sam, as represented in the graph above, is really Uncle Sam. The graph proportionately scales U.S. tax revenue and government debt outstanding data to Sam’s current income of $100,000. Currently, annual tax revenue stands at $1.908 trillion while the total amount of government debt outstanding is $21.090 trillion.

To further emphasize the growing divergence between tax revenue and debt outstanding, consider that debt grew by 6.26% and revenue shrank by 6.03% over the last year. While the recent decline in revenue is largely a function of the new tax legislation and may not last, the long-term trends are not encouraging. Over the last five and ten years, tax revenue increased annually by 2.22% and 2.09% respectively, while debt outstanding increased by 4.69% and 8.37% annually.

If the graph above were truly the financial situation of a guy named Sam, we would confidently tell you he went bankrupt 20 years ago.

. . .

The Congressional Budget Office (CBO) expects government debt outstanding to rise by over $1 trillion per year for each of the next four years. At the same time, neither we nor the CBO expect to see interest rates decline meaningfully. However, and of grave concern, the possibility of higher rates is real. Given the outlook for rising debt and flat to rising interest rates, interest expense will continue to make Uncle Sam’s financial problems even more daunting.

Judging by historically low-interest rates, investors, ourselves included, are not concerned that the U.S. government will default. Given the government has a printing press, we see little reason for such a concern.

That said, we are greatly worried that the growing imbalance between debt outstanding and the means to pay it off will encourage further reckless monetary policy.

There's more at the link.

It's bad enough looking at the federal government's debt situation, as shown above.  When you look at almost all of the 50 states that make up this country, their situation is proportionately just as bad, if not much worse in some cases.  To take just one recent example, Illinois' unfunded pension liabilities alone (which we've discussed before in these pages) amounted to over 600% of state income in 2017.  That's over and above all other liabilities, debts and financial commitments.

If we ran our household accounts the way our federal and state governments run theirs, we'd all have been bankrupt long ago.  Tragically, many of us have followed their example.  Consider this:

Household debt-to-income ratios ... compares monthly debt obligations to monthly gross income to determine capacity for taking on new debt. Mortgage or rent is usually the largest debt obligation people have, and this is central to the debt component of the ratio calculation. Also included in the debt amount are monthly car loan payments, monthly credit card minimum payments and any other regular loan payment obligations ... Typically, a debt-to-income ratio 36 percent or below is considered financially healthy ... ratios of 37 to 42 percent are not bad, 43 to 49 percent require some intentional repairs, and 50 percent or above likely require aggressive professional debt repair help.

And now consider this:

The average U.S. household ... owed $204,992 in mortgages, credit cards, and student loans in mid-2015 on a median household income of $55,192 ... Indebted U.S. households carry an average credit card balance of $15,706 ... Combine this with stagnant wages for most Americans and the point is that ... average Americans are living pretty close to the edge.

Those mid-2015 numbers have only gotten worse for most people since then.  They translate to a frightening debt-to-income ratio for many people.  I know several individuals and families who are borrowing from one credit card to pay another, every single month, and are more in debt at the end of every month than they were the month before.  They're sinking, and there's no financial lifeboat coming to rescue them.

The huge overhang of debt in our society has not been resolved by recent economic progress.  In fact, the most recent federal budget is adding a trillion dollars of debt to our national burden in a single year.  Nor do I blame the Republican party for that - it was just as bad, if not worse, under Democratic party government.  Both sides of the aisle are guilty of spending money we don't have, in order to bribe voters to support them.  We, as a nation, have become so addicted to debt that if we were no longer permitted to use it, our entire economy would collapse overnight.  A huge proportion of our everyday economic activities, as individuals, companies, cities, states and nations, is predicated on being able to borrow money we don't have to spend on what we need.  Take away the ability to borrow, and we'd lose the ability to spend - and every business and administration depending on us to give them money would collapse.

I've written many times about the problem, and the threat posed by, debt in our society.  Last year I warned that "Debt is killing us".  Those warnings remain true, because we're getting more and more in debt by the day.  Unless we, as individuals and as a nation, break that habit, the day must inevitably come when we're called upon to repay our debt . . . and it's already too big to repay.  It simply can't be done.  There isn't that much money in existence, much less hard assets that can be sold to pay it off.  The rest of the world is in the same boat.  The only way to pay off such levels of debt is to "print money", create it out of nothing and nowhere as binary ones and zeros in a computer system.  If we do that, the inflationary impact will be catastrophic.  (Want a recent example?  See Venezuela.)

Sooner or later, the economic pigeons have to come home to roost.  It behooves all of us to put our own financial houses in the best possible order, so that when they do, we can be positioned as well as possible to ride out the storm.  That doesn't mean we won't be buffeted and battered by the weather, but we may at least be able to get through it together.

Peter