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The following presentation by New England Capital Financial Advisors, LLC (“NECFA”) is intended for general information purposes only. No portion of the presentation serves as the receipt of, or as a substitute for, personalized investment advice from NECFA or any other investment professional of your choosing. Please see additional important disclosure at the end of this penetration. A copy of NECFA’s current written disclosure Brochure discussing our advisory services and fees is available upon request or at www.newenglandcapital.com.
Ask the Advisor
Hi this is Chris Beale with New England Capital and welcome to my first installment of Ask the Advisor! As you may remember, at the end of my last video blog I asked you to send me any questions that I could answer in this forum. And you sent me some great questions. Thank you and keep them coming! I hope to answer 2-3 question per blog, but this time I’ll only have time for one.
The first question is about the US National Debt. Specifically, “Is the mounting national debt be something we should be concerned about?” I had to go back for my research for that fabulous publication I read in my youth, MAD Magazine. If you remember, the mascot/spokes figure of MAD Magazine was Alfred E. Newman. The famous quote coming from that gapped toothed mouth was “What, me worry?” The answer to the question is its not a concern until it becomes a concern. Let me explain.
I’ve been very concerned about the debt and deficits for years for reasons I’ll explain below. A quick point of reference between deficits and debt. A deficit occurs when spending exceeds income and is typically measured annually. The national debt is the total accumulation of those deficits plus the associated interest.
So, how much is the US debt? According to usdebtclock.org, the total is over 35 trillion dollars. Divide this number by 333 million people in the US, and your share is over $105,000. If you can please make your check payable to the US treasury, or $420,000 for a family of 4, After we’ve all done this none of us would have to worry.
In this election year, I can safely say there is bipartisan responsibility for this problem since both parties have held power in the last 50 years with substantial debt increases.
But is our national debt truly a problem?
Some say it’s not as long as investors, people and countries, are willing to buy our bonds. Selling US Treasury Bonds is the way the government borrows money. A bond is simply an I.O.U. in which our government promises to pay interest now and principal when the bond matures.
Obviously as anyone individual, family or business who has racked up too much on their credit cards or too much mortgage debt or loans can attest, too much debt can certainly cause problems. Governments with too much also have problems. For example:
- If investors demand higher interest rates on our bonds, those higher rates would cause inflation to heat up. So even if the Federal Reserve wants to lower rates, market forces could work against it, forcing interest rates higher.
- Too much total debt causes more total interest payments. If we have to pay more in interest this would lead to having less federal money available for social programs, military spending or other obligations.
As you can see in the chart, interest payments are estimated to surpass military spending. The bipartisan Congressional Budget Office estimates we will spend $892 billion in interest this fiscal year. That’s $892 billion that’s not available to protect our country, to pave roads, or to shore up social programs like Social Security or Medicare. Projected military spending this fiscal year is $820 billion. Historically, great countries, civilizations and societies who spend more on interest than military have not remained great powers. This is true when Spain was a world power, France, the Ottoman Empire, the Roman Empire and the British Empire. The US will join this group this year.
Too much debt could also cause a lack of confidence in our ability and/or willingness to pay our obligations. This could certainly cause the dollar to lose status as a reserve currency of the world. This would also lead to increased inflation. Remember our currency lost its triple A rating during the government shutdown in August 2011.
Let me answer a follow up question that wasn’t asked: “Why is the debt increasing?”
- Higher interest rates are causing higher interest payments which are adding to the debt.
- Our current tax code isn’t providing enough revenue to cover our expenses including but not limited to Social Security and Medicare.
By the way, proposals by both major party Presidential candidates for eliminating income tax on the Social Security payments are equally stupid. First it weakens already financially weak programs. Generating less revenue is no way to strengthen Social Security or Medicare. Second, these proposals would not help half of all Social Security recipients. Why? Half of all Social Security recipients don’t pay any income tax! So, it would benefit people like me who can afford to pay and jeopardize people who count on these programs to remain financially independent.
So, are we doomed to be a former superpower due to our lack of fiscal discipline?
No! There is hope! Great Britain came back from a large national debt, although they screwed up again. But Finland, Denmark, Canada and Sweden more recently emerged from their debt crisis and are financially healthy now.
If you’d like a road map for getting the US financially stable, search the internet for the BOWLES/SIMPSON report on fiscal responsibility. It was a great bipartisan bill that could have gotten out of congressional committee and been passed into law with a little push from then President Obama.
Thanks again and keep the questions coming! Next time I will tackle a few more questions on simple estate planning, the meaning of fiduciary when we call ourselves fiduciaries, Roth versus traditional contributions in your IRA or 401k and more.
IMPORTANT DISCLOSURE INFORMATION
Please remember that past performance is no guarantee of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by New England Capital Financial Advisors, LLC [“NECFA”]), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from NECFA. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. NECFA is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the NECFA’s current written disclosure Brochure discussing our advisory services and fees is available for review upon request or at www.newenglandcapital.com. Please Note: NECFA does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to NECFA’s web site or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please Remember: If you are a NECFA client, please contact NECFA, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. Unless, and until, you notify us, in writing, to the contrary, we shall continue to provide services as we do currently. Please Also Remember to advise us if you have not been receiving account statements (at least quarterly) from the account custodian.