US National Debt: The Horrifying Truth

President Biden announced a supposedly promising budget plan for the fiscal future of the United States in March 2024. With this new fiscal plan, the budget deficit is expected to be $16.6 trillion USD instead of $19.6 trillion USD in 10 years. So, $3 trillion USD will be kept in the pockets of American taxpayers. What a day for celebration!  

Unfortunately, the American national debt is currently $34.5 trillion USD. Since it is not expected to decrease, it could be around $50 trillion USD in 10 years with an optimistic estimate.

In addition to this huge government borrowing, the fiscal plan mentions serious tax increases. Biden's 10-year budget plan expects $70 trillion USD in taxes to be collected. Since the expected amount of tax is $5.5 trillion USD, more taxes will not close the gap. Moreover, the amount to be paid for debt interest in 2025 is expected to be $1 trillion USD. This is not a cheerful moment for Americans.

While hanging like a dark cloud over American taxpayers, these huge budget deficits and national debt reveal the government's fiscal irresponsibility and the dangers of its monetary policies.

As Friedman said, the easiest money to spend is someone else's money, which is your taxes. However, there is no free lunch. Somebody must pay for it. So, the government will continue to steal your wealth by printing money, creating inflation, borrowing and increasing your taxes. Certainly, the 10-year budget projection is not in your favour.

If you want to learn about your investment alternatives, you can subscribe to our free newsletter. I have been counselling expats for many years to protect their wealth and future. I would be happy to help you with our experts and business partners at Expat Money. Now, let's examine why national debt and budget deficits are a huge problem for you and your future.

WHAT ARE BUDGET DEFICITS AND THE NATIONAL DEBT?  

When a government's spending exceeds its revenues in a given period, it creates a budget deficit. This leads the government into debt because it must borrow to cover the deficit.

The national debt is a country's total public debt. It is usually the sum of the government's past budget deficits. The debt is created by financing it through government bonds and other borrowing instruments. The national debt can be defined as the government's total liabilities.

THE RELATIONSHIP BETWEEN BUDGET DEFICIT AND NATIONAL DEBT

A government constantly running a budget deficit will increase the national debt. As the national debt accumulates, the interest payments on that debt will also increase. Allocating more budget resources to interest will result in further budget deficits. Persistent budget deficits can threaten the sustainability of the national debt. High debt levels can slow economic growth, increase taxes, and restrict future government spending.

THE FORGOTTEN FISCAL DISCIPLINE

Unfortunately, the balanced budget is a long-forgotten fiscal principle. Progressives almost accuse you of being the enemy of the state if you defend financial responsibility. The budget deficit has been reduced to a problem related to the country's ability to repay its debt.

Economists measure this ability by dividing the budget deficit by the gross domestic product (GDP). In 1943, the deficit-to-GDP ratio for the US was at a record low of -29.55%. The budget deficit was around $55 billion USD then, and GDP was only $203 billion USD. 

However, even the World Bank wants to limit excessive borrowing in this new monetary order. According to the World Bank, the country has reached a turning point if the debt-to-GDP ratio is more than 77%.

After a debt ratio of 77%, the country's lenders start questioning the security of their bond repayments. The US Debt/GDP ratio rose above 130% in 2020 and has remained above 115% since then. If it continues to rise at this rate, the national debt is estimated to reach 236% of GDP in 2054.

Confidence in the US bond market is not what it used to be, and the US government is forced to offer high interest rates to borrow. However, the dollar as a reserve currency keeps the US in the investable country category.

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THE MORAL TRAP HIDDEN IN THE NATIONAL DEBT

The US's high Debt/GDP ratio has not yet become a major crisis because the dollar is the reserve currency. The dollar's ​​status as a reserve currency gives the US economy many advantages, such as low borrowing costs, financial flexibility, capital flows, geopolitical power, and increased import capacity.

However, the dollar also creates a moral hazard for American governments by making it easy to deviate from fiscal discipline. A moral trap is when a person or institution acts with the belief that others will bear the consequences of their irresponsible behaviour. All taxation is theft, but governments that spend more than they collect in taxes are already taxing your future earnings and even your children's future. The worst part is that taxpayers have no real power over the budget that is spending their future. So, this is the ultimate fiscal irresponsibility and form of moral hazard.

CONSTANTLY INCREASING MONEY SUPPLY

The US budget Deficit/GDP ratio for 2024 was forecasted at 7%, higher than the previous year's 6.3%. The rate peaked in 2020, rising to 14.7%. Although the rate decreased in the following years, the trend is still upward.

You can follow the departure from fiscal discipline from the growth of the Fed Balance Sheet and M2 money supply. The Fed's balance sheet directly affects the money supply and interest rates, providing or limiting economic liquidity. M2 money supply is a measure that includes money in circulation, savings accounts, and assets that can be easily converted to cash. These two measures are important for understanding inflationary pressure.

The Fed Balance Sheet, which was $4.1 trillion USD at the beginning of 2020, reached $8.8 trillion USD at the end of 2021. M2, which was $8.4 trillion USD before the 2008 Financial Crisis, became $15.5 trillion USD in 2020. In 2021, M2 increased to $20.5 trillion USD. It is not surprising that inflation reached 9.1% in 2022.

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The United States faces a critical financial deficit due to rising Social Security and Medicare spending, with the national debt projected to exceed $120 trillion USD over the next 30 years, requiring significant budget cuts and urgent reforms

REASONS FOR THE DEFICIT

There are many reasons why the budget deficits and national debt in the United States are due to radical reforms: social security and Medicare spending, military spending, governmental economic interventions, an unreasonable tax system, and politicians' limitless ambitions. Here, I will only briefly discuss social spending and present the seriousness of the problem.

SOCIAL SECURITY AND MEDICARE SPENDING

The rising cost of the US social security system seems inevitable, and 74 million baby boomers retiring are making Social Security and Medicare more expensive. These programs cost much more than they bring in through payroll taxes and Medicare premiums. In 2023, the shortfall is more than $650 billion USD. Including interest on the debt, it will reach $2.2 trillion USD a year by the next decade. By 2034, Social Security and Medicare will collect $2.6 trillion USD but will need $4.8 trillion USD to cover benefits and interest.

Over the next 30 years, Social Security and Medicare are expected to fall short by $124 trillion USD. By 2054, these two programs are expected to account for 11.3% of the economy's yearly deficits. Meanwhile, tax revenues are projected to rise, and spending on other programs will shrink as a percentage of the economy. This means that a significant portion of the long-term debt increase will come from Social Security, Medicare, and interest on their deficits.

IS THERE A FEASIBLE SOLUTION TO THE DEBT CRISIS?

The American government cannot continue a path toward debt above 200% of the economy. Financial markets cannot provide the United States with over $120 trillion USD in long-term debt at low interest rates of 2% or 3% over the next 30 years. Lenders will demand higher interest rates, and rising debt costs will create a dangerous cycle. This path is unlikely to be reversed without major budget cuts.

While the latest tax revenues are about 17-18% of GDP, federal spending has risen to about 34% of GDP. However, taxing the rich and corporations more is outright immoral and definitely insufficient to solve the national debt crisis. Aside from the immorality of taxation, progressive taxation undermines the principle of equality before the law by discriminating against those who are overtaxed. Progressive taxes also largely target the middle class and force them to finance policies they do not support. This tyrannical taxation policy has restricted productive people's creative abilities and reduced national wealth.

Politicians must refocus on government spending rather than forcing people to pay for public failure. Social Security, Medicare, and military spending will have to be drastically reduced, and new taxes will be imposed on society. Without radical measures, Americans are moving toward a dark future in which taxpayer money is just enough to pay the interest on the debt every year.

The future of your hard-earned wealth depends on you taking control and investing in tangible assets, as traditional investments will not protect you from economic instability, rising taxes, or government failures

YOUR FUTURE DEPENDS ON YOU

Shrinking economies, rising taxes, and collapsing public services are not just an American problem. However, Americans are at a level where they overshadow everyone else in national debt. Pathological economic and social problems have gripped all so-called developed economies. Governments continue to devise intricate plans to blame and bear the cost of their failures on you every day.

Fortunately, you are not a prisoner of traditional investment and retirement schemes. I left the stock market many years ago and have since focused on investing in tangible assets like real estate, farming, timber, forestry, and precious metals like gold, which tend to hold and even increase their value during inflation. There is no reason why you should not follow the same path I did. You can craft your Plan-B to protect your future and wealth. Many savvy investors seek alternatives to traditional capital markets through options like self-directed individual retirement accounts (SDIRAs), giving you more control and freedom over your finances.

Related content: Why Every American Must Get A Second Passport In 2024

Protect your family's future by planning a solid alternative against inflation and government-induced crises. You should act now and create your Plan-B, as relying on politicians is definitely not a good idea

CONCLUSION

You have every right to be upset with politicians, but it’s you, not them, who must protect your wealth and future. Inflation, international economic crises, and geopolitical risks will continue to be a part of your life unless you take action against the problems caused by governments. Each time the debt increases, you pay the price. That’s why it’s essential to act practically. I’ve been working with a team of specialists to help my clients protect their wealth and freedom for a long time. Subscribe to our free newsletter today and start creating your Plan-B — things won’t improve on their own.