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Executive Summary

U.S. Federal debt outstanding totals about $31 trillion. From 2018-2021 (4 years) the debt grew as much as it did for the first 232 years (founding through 2007) combined! Now take a look at the math:

U.S. Estimated Income Tax Revenue                                                                 $2.5 trillion

U.S. Estimated Social Security and Medicare Tax Revenue                          $2.0 trillion

Estimated total revenue                                                                                         $4.5 trillion

Estimated Social Security and Medicare benefits paid annually                  $2.0 trillion

Estimated Other U.S. Government spending                                                   $4.0 trillion

Estimated total spending                                                                                      $6.0 trillion

Estimated annual deficit spending                                                        $1.5 trillion

The $600 billion gross interest expense on the debt is around 24% of income tax collected. With the Fed raising interest rates, these number will only get worse. Additionally, the Social Security trust fund is projected to be depleted in 12 years and the Medicare fund in six years. 

Lawmakers on both sides do not want to discuss possible solutions as it is not politically expedient. To see how this could end, please look at solutions in The Details.

“I believe that the root cause of every financial crisis, the root cause, is flawed government policies.”
–Henry Paulson

The Details

Presently, Federal debt outstanding totals about $31 trillion. Since the start of the Financial Crisis in 2007, the debt balance has more than tripled. In the prior four fiscal years, 2018 – 2021, the debt balance grew as much as it did for the first 232 years (founding through 2007) of our country combined.

The financial status of the U.S. is on perilous ground, and the current spike in interest rates is not going to help the matter. Many in government are proudly proclaiming that the deficit for fiscal year 2022 (ending September 30, 2022) is projected to be $1.4 trillion lower than fiscal 2021. What is excluded from the context of that statement is the 2021 deficit of $2.8 trillion was severely inflated due to pandemic stimulus spending. For context, the projected deficit for 2022 is expected to be almost 1.5 times the 2019 (pre-pandemic) deficit. And the projections for 2023 could be seriously understated considering the high possibility of a recession. Additionally, the spike in interest rates means interest expense will be significantly higher than previous expectations. See a chart of annual Federal deficits below.

The U.S. Federal government spends close to $6 trillion annually. Of this about $2 trillion is for Social Security (SS) and Medicare. Therefore, net spending for other items is around $4 trillion. This excludes additional spending for extraordinary items during recessions, pandemics, etc. On the revenue side, total collections are about $4.5 trillion. Of this, around $2 trillion is from taxes for SS and Medicare benefits, leaving about $2.5 trillion for Federal expenditures, ex- SS and Medicare.

The bottom line is the U.S. collects about $2.5 trillion in income taxes to be used for about $4 trillion in expenditures. Now, here is where it starts to get hairy. The Federal Reserve Bank (Fed) has been on a terror raising interest rates, trying to get inflation under control. Gross interest payments on our soaring debt are now close to $600 billion per year. See graph of interest expense below.

Many believe the rise in interest rates is still in its early phase. Even so, $600 billion in interest expense represents 15% of total Federal expenditures (excluding SS and Medicare), and – get ready – about 24% of income tax collected. The exponential rise in debt combined with skyrocketing interest rates means the U.S. debt is in a spiral. As the percentage of total spending required for interest rises, more debt will have to be issued to provide the funds to pay interest. Which will then increase the amount of interest due on the debt, etc., etc. Is the picture becoming more clear?

And this is focusing strictly on interest payments. There was a time in the past when lawmakers seemed concerned about the sustainability of SS and Medicare. This has become such a political hot potato, no one even discusses it anymore. However, according to the report summarizing the annual reports for SS and Medicare, put out by their respective boards, the SS trust fund is expected to be depleted in 2034 (12 years). After that, collections would not be sufficient to support full benefit payments, and benefits would drop to about 77% of required levels.

Even more urgent, the Medicare trust fund is projected to be depleted in 2028 (6 years). At that point benefits would drop to 90% of scheduled amounts. See the graph below showing asset reserves as a percentage of annual cost.

U.S. Federal debt is growing, and interest rates are soaring. The Federal debt balance is currently 123% of GDP. The problem is the debt is growing much faster than the economy. And that is before interest rates reach their peak, recession spending is enacted, and solutions to the SS and Medicare underfunding crisis are addressed. Since it seems lawmakers have an aversion to reducing spending, the spending spiral will continue to spin. The deeper the problem, the faster it spins.

In the current predicament, there are only two ways to reduce the debt to a reasonable percentage of the economy: (a) default, or (b) hyperinflation. Since the U.S. dollar represents the global reserve currency, and the Fed can print as much as needed, default will never happen. Unfortunately, that only leaves one other solution. Of course, a third resolution would be possible if the budget were drastically cut; however, this would likely result in a deep depression, and no politician has the appetite for such a move. Unfortunately, the end game is getting nearer. It’s just math.

The S&P 500 Index closed at 3,873, down 4.8% for the week. The yield on the 10-year Treasury 

Note rose to 3.45%. Oil prices fell to $85 per barrel, and the national average price of gasoline according to AAA dropped to $3.68 per gallon.


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© 2021. This material was prepared by Bob Cremerius, CPA/PFS, of Prudent Financial, and does not necessarily represent the views of other presenting parties, nor their affiliates. This information should not be construed as investment, tax or legal advice. Past performance is not indicative of future performance. An index is unmanaged and one cannot invest directly in an index. Actual results, performance or achievements may differ materially from those expressed or implied. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy.

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