By Dr. Harold Wong Guest Columnist
Greensburg Daily News
---- — On Oct. 16, 2013, Congressional Republicans gave up their bitter budget fight with President Obama and approved legislation ending the 16-day government shutdown. Obama signed the bill on October 17, which also extends the federal borrowing power in order to fund the government through January 15, 2014 and raises the debt limit through February 7, 2014. Did the American people actually win?
A Dec., 7, 2012 article in The Washington Times, “U.S. borrows 46 cents of every dollar it spends”, goes over the numbers. “The government is poised to post another $1 trillion deficit in fiscal year 2013, which would mark the fifth straight year. Before that, the record was $438 billion, which came in 2008, President George W. Bush’s last full year in office.”
Another source, www.usgovernmentspending.com, shows that the current Federal deficit is about $16,738,158,460,000, or about $17 trillion. This number does not include state and local debt, and does not include the unfunded liabilities of entitlement programs like Social Security and Medicare. The Federal Debt per person is about $51,297. In 2009, our total federal debt finally equaled the total GNP, or gross national production of the entire economy.
These numbers are too huge to comprehend, so let’s put it in the context of a family of 4. Assume that the husband and wife both work and earn $80,000 annual income and net $60,000 after tax. Instead of living within their means, suppose they spend $111,111 annually. This is composed of their $60,000 after-tax income plus $51,111 borrowed on credit cards (46 percent of the $111,111).
After one year, they will owe not just the $51,111 borrowed but also interest. If this was borrowed from credit cards that charged 20 percent interest, that would be $10,222 of interest, or a total of $61,333 owed. In year 2, they borrow another $51,111 because they won’t cut spending. They now owe $61,333 plus $51,111, or $112,444. If one adds 20 percent interest, they will owe another $22,488 a year later, or a total of $134,932. At the end of 5 years, they will have borrowed $255,555 from their credit cards and owe about $153,332 in interest, for a total of $408,887 of additional debt.
If this family were like the federal government, current total debt would equal total family income, or $80,000. When one adds it to the $408,887 of additional debt incurred over the next five years, the family will owe $488,887. Imagine this family could issue a 30-year IOU, like the Federal government does with 30-year Treasury bonds. If they paid 6.5 percent, typical of the average mortgage rate over the last 45 years, the monthly payment would be $3,073.45 or $36,881.41 annually.
To pay off their debt, the family would either have to cut annual spending by 61 percent or increase income by 46 percent. The family would have to earn an additional $46,102 to net $36,881 after taxes. $46,102 is 58 percent of their current $80,000 annual gross income. How many American families could increase their income from $80,000 to $126,102 in one year or cut spending by $36,881 to $23,119?
If this were an old-fashioned family, the 2 teenagers would go to work part-time, both parents would get a second job, and they would cut spending to the bare necessities. They would grow their vegetables in a garden, eat rice for starch, and use meat sparingly. They would sell one of their cars and have 2 new housemates pay rent.
Conclusion: Many of the mainstream politicians have no interest in solving our U.S. debt crisis. They hope they can keep borrowing from Asia and when our creditors cut us off, they will be retired millionaires. Question: Are Americans willing to cut spending, raise taxes, and stop borrowing?
Contact Dr. Wong at: (480) 706-0177, firstname.lastname@example.org, or www.drharoldwong.com. For his previous articles or future seminars, click on www.DrWongInvestorGuide.com.