There is a big pink elephant in the room and only a few want to talk about it. Some economists have been warning about the ever-increasing national debt and annual budget deficit for decades. Nevertheless, the apocalypse they fear never seems to materialize, so, the government just keeps on spending. Is this fiscally reckless and irresponsible or are the fiscal hawks simply over-reacting? Before we delve into the gist of this narrative, let’s take a brief stroll down memory lane. On Sept. 15, 1985, just a few months after I became a registered financial advisor, a headline and opening sentence from the New York Times read as follows:
A $2 Trillion National Debt: Not Just Another Milestone
“A national debt of $2 trillion, which the United States is nearing, is one of those milestones like the population’s reaching 200 million, or the nation turning 200 years old. Two trillion dollars. A two plus 12 zeros. To count the pennies, one a second for 24 hours a day, would take 63,419 years. It is 12 times all the cash in the land and equal to all the wages Americans will be paid this year.” A few weeks later on Oct. 27, 1985, a Los Angeles Times headline and opening paragraph read as follows:
Federal Deficit Hits a Record $211.9 Billion
“The federal government reported Friday that it spent $211.9 billion more than it received in revenues during the last fiscal year, resulting in the largest annual budget deficit in U.S. history”.
So here we are 35 years later and the story is the same; increasing budget deficits and national debt. According to Thebalance.com, The U.S. federal budget deficit is projected to reach a record of $3.3 trillion in 2020 compared to $211.9 billion 35 years ago. This increase is largely a result of government spending in reaction to the coronavirus pandemic. U.S. federal outlays for 2020 total $6.6 trillion, which is $2.2 trillion more than in 2019. Revenue for 2020 is projected to be $3.3 trillion, too, which leaves the deficit at $3.3 trillion. The Congressional Budget Office (CBO) projects that this deficit for 2020 will be 16% of U.S. gross domestic product (GDP), which is the largest it’s been since 1945.
To make an arguably concerning situation worse, the national debt of the United States is at an astonishing record of more than $27 trillion, which is serious cheddah! Thanks to the incredibly informative website, The Peter G. Peterson Foundation, that mind-boggling number means that if every person in the United States paid $81,104, we could pay off our national debt! Yikes! Forgive me for my incredulity (you like that fancy word?), but is it just me or is there a massive disconnect here? As a side note, and at the risk of hurting your intelligence, a budget deficit occurs when the country’s expenditures exceed its income within a specified fiscal year. Federal Reserve Chairman Jerome Powell says the day of reckoning is still coming but isn’t here yet. The insistent catchphrase of “new all-time record debt and deficit” has been played so often since I became an advisor close to four decades ago, that it sounds like a broken record. For readers born after the age of vinyl, the term refers to when the needle is stuck in a groove, repeating a phrase repeatedly until you either move the arm or throw the record at a wall in disgust! Nevertheless, how high must the national debt and deficit get before it will matter?
Many argue that major economies as the United States do not need to worry about running a deficit or increasing its debt because our central banks can just print money. I do not know about you, but this just does not seem right. This printing of new money approach reminds me of the following Mark Twain quote, “It’s not what we don’t know that gets us in trouble. It’s what we know for sure that just ain’t so.” Perhaps we are indifferent to our debt because it doesn’t affect us today. In other words, let’s just kick the can down the road for now. Stated maybe more clearly, we are like the man falling from a 60-story building, who at the 40th floor thinks “so far, so good.” I have argued for 35 years that our growing debt will inevitably lead to a financial train wreck. Goes to show you how much I know, as I have been dead wrong for 35 years! Regardless, that’s my story and I am sticking with it! I echo the words of wisdom from the corn-fed capitalist, Warren Buffet ,who said, “When you combine ignorance and borrowed money, the consequences can get interesting.” I am afraid that when we start to notice the big pink elephant in the room, it might be too late. Perhaps a crisis has already begun, but we just don’t know it yet.
Harry Pappas Jr. CFP®
Managing Director-Investments
Master of Science Degree Personal Financial Planning
Certified Estate & Trust Specialist ™
Certified Divorce Financial Analyst™
Pappas Wealth Management Group of Wells Fargo Advisors
818 North Highway A1A, Ste. 200
Ponte Vedra, Florida 32082
904-273-7955
harry.pappas@wellsfargoadvisors.com
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