Doug Casey on US government debt

Some juicy excerpts from the legendary investor Doug Casey at his International Man website: (bold mine)

The only way a society (or an individual) can grow in wealth is by producing more than it consumes; the difference is called “saving.” It creates capital, making possible future investments or future consumption. Conversely, “borrowing” involves consuming more than is produced; it’s the process of living out of capital or mortgaging future production. Saving increases one’s future standard of living; debt reduces it.

If you were to borrow a million dollars today, you could artificially enhance your standard of living for the next decade. But, when you have to repay that money, you will sustain a very real decline in your standard of living. Even worse, since the interest clock continues ticking, the decline will be greater than the earlier gain. If you don’t repay your debt, your creditor (and possibly his creditors, and theirs in turn) will suffer a similar drop. Until that moment comes, debt can look like the key to prosperity, even though it’s more commonly the forerunner of disaster.

Of course, debt is not in itself necessarily a bad thing. Not all debt is for consumption; it can be used to finance capital goods, intended to produce further wealth. But most US debt today finances consumption—home mortgages, car loans, student loans, and credit card debt among other things.

Government Debt

It took the US government from 1791 to 1916 (125 years) to accumulate $1 billion in debt. World War I took it to $24 billion in 1920; World War II raised it to $270 billion in 1946. Another 24 years were needed to add another $100 billion, for a total of $370 billion in 1970. The debt almost tripled in the following decade, with debt crossing the trillion-dollar mark in October 1981. Only four and half years later the debt had doubled to $2 trillion in April 1986; four years more added another trillion by 1990; and then in only 34 months it reached $4.2 trillion in February 1993. The exponential growth continued unabated. US government debt stood at $18 trillion in early 2015. Off-balance-sheet borrowing and the buildup of massive contingent liabilities aren’t included. That may add another $50 trillion or so.

In 1964—the year Lyndon Johnson was elected—US federal debt stood at $316 billion, and interest on it was $10.7 billion, which was equal to 14.8% of personal and corporate tax revenues. When Reagan left office in 1989, the debt stood at $3.2 trillion, and interest was $214 billion, taking 43% of tax revenues. When Bush left office in 1993, the debt stood at $4.2 trillion and interest at $293 billion, consuming 52% of personal and corporate income taxes.

As of fiscal-year 2013, there was $16.8 trillion in federal debt and $416 billion in interest payments, which consumed about 15% of tax revenues. When interest rates rise again, even to their historical average, the US government will find most of its tax revenue is going just to pay interest. There will be little left over for the military and domestic transfer payments.

When the government borrows just to pay interest, a tipping point will be reached. It will have no flexibility at all, and that will be the end of the game.

In principle, an unsustainable amount of government debt should be a matter of concern only to the government (which is not at all the same thing as society at large) and to those who foolishly lent them money. But the government is in a position to extract tax revenues from its subjects, or to inflate the currency to keep the ball rolling. Its debt indirectly, therefore, becomes everyone’s burden.

The consequences of all this are grim, but the timing is hard to predict. Perhaps the government can somehow borrow amounts that no one previously thought possible. But its creditors will look for repayment. Either the creditors are going to walk away unhappy (in the case of default), or the holders of all dollars are going to be stuck with worthless paper (in the case of hyperinflation), or the taxpayers’ pockets will be looted (the longer things muddle along), or most likely a combination of all three will happen. This will not be a happy story for all but a few of us.