Submitted by Lance Roberts of STA Wealth Management,
It currently seems that one of the most likely outcomes of the current debate is a continuing resolution of the existing budget of $967 billion and a subsequent increase to the debt ceiling of a like amount. The problem, however, is that the run rate of debt by the current administration has been averaging about $1.1 trillion per year since 2008. This leaves an annual shortfall of roughly $133 billion.
Currently, the Senate Democrats and the White House, are pushing for an elimination of the debt ceiling entirely but are willing to settle for a “clean” continuing resolution to fund the government through 2014. The chart below shows the current projected rates of debt to real GDP through 2018 according to the CBO estimates versus the current annual run rate of $1.1 trillion.
At the current rate of debt increase the U.S. will pushing 130% of debt to real GDP by 2018. This is, of course, not including the funding needs that will ultimately be required to support the increased costs of the entitlement programs of Social Security, Medicare and now the Affordable Care Act (ACA). The reality is that debt needs will substantially increase as entitlement programs continue to consume ever larger chunks of the current budget. By 2020 the current welfare programs alone are expected to require 75% of all federal revenues and this does not include the impact of the ACA. This, of course, is unsustainable.
The next chart shows the current increases in Federal Debt and Real GDP beginning in 2008 and estimated through the end of 2013.
Government spending has long been believed to have a multiplier effect in the economy. However, as the chart above shows, the reality is quite shocking. Each dollar in debt only increased GDP by roughly $0.15. In other words each $1 in government spending actually has a negative multiplier effect of 85% in the real economy.
The point here is that the leaders in Washington need to start focusing on the real issues at hand. While we toss around $100 billion here and there, as if it is left pocket change, the reality is that the rising debt levels will continue to drag on economic growth going forward. Furthermore, the current social welfare programs continue to become increasingly more unsustainable over time as unfunded liabilities continue to amass. Lastly, the onset of the ACA is not only going to dramatically increase real taxes on the economy, which will further detract from economic growth, but will ultimately compound itself into an additional entitlement liability that will consume ever more of a dwindling pool of tax payer dollars.
Of course, the continued shenanigans in Washington, inept leadership and lack of fiscal responsibility is why there is a continuing increase in the number of individuals who perceive the need for a third political party. From Gallup:
“Amid the government shutdown, 60% of Americans say the Democratic and Republicans parties do such a poor job of representing the American people that a third major party is needed. That is the highest Gallup has measured in the 10-year history of this question. A new low of 26% believe the two major parties adequately represent Americans.
The results are consistent with Gallup’s finding of more negative opinions of both parties since the shutdown began, including a new low favorable rating for the Republican Party, and Americans’ widespread dissatisfaction with the way the nation is being governed.”
Change was promised. Change is wanted. Change will happen. Unfortunately, history shows that REAL change, politically and otherwise, has only occurred under the worst possible conditions.