EDMOND — We’ve been hearing a lot about canaries lately. You know, the ones that hang out in coal mines. Of course, this saying comes from the old days of mining when miners actually would bring a bird, like a canary, into the mine to act as a warning device. Since birds are sensitive to toxic gases, if the bird suddenly died it was a warning of high levels of toxic gases. One of the serious “canaries” today is the current debt crisis in the U.S. You might say that the canary isn’t dead but it could be on life support.

Hardly a day goes by that we don’t hear concern about the rising levels of debt, both private and government, in the U.S. It’s a big worry and concerned citizens want the government to get its balance sheet in order. It is now even fashionable to “study the deficit” and make recommendations to reduce it. We don’t need a lot of high-priced scholars and economists to figure that one out.  We all know you simply have to increase income or reduce expenses, or both.  Of course, that’s easier said than done and some people think you can borrow your way out of debt.

But what exactly is our national debt? In simple terms, the national debt consists of the total of all the federal deficits in history minus all the budget surpluses. As of late 2009, that figure was $7.5 trillion. Some estimates put it close to $11 trillion now.

Obviously, this is a huge number. But to really understand it you have to look at it in relationship to other numbers. Economists generally look at the debt in relation to the nation’s total output of goods and services, which is the gross domestic product. The debt came to 53 percent of GDP in 2009, which was up from 40 percent the year before and 35 percent in 2000. The all-time high was 109 percent at the end of World War II for obvious reasons.

During much of the past 50 years the national debt fell steadily as a percent of GDP. This was partly because the economy grew faster than the debt, but also because inflation eroded the value of the debt. The $250 billion debt that existed at the end of the WW II would have been $2.3 trillion if calculated in today’s dollars.

The full scope of the government’s debt appears annually in something called the Financial Report of the United States Government. According to the latest report on Feb. 26, in addition to the national debt, the federal government owes $5.3 trillion to veterans and federal employees. But the really big debts are those owed by Social Security and Medicare. During the next 75 years, the federal government has promised benefits for these two programs in excess of anticipated payroll tax revenues equal to $7.7 trillion and $38 trillion, respectively.

The Treasury Department estimates Social Security’s deficit at 1 percent of GDP in the next 75 years and Medicare’s deficit at 4.8 percent. With federal revenues estimated to be about 19 percent of GDP in the long run under current law, taxes would have to rise by about one-third to pay all the promises that have been made for these two programs alone. Is your head spinning yet?

The Office of Management and Budget estimates that in the absence of massive cuts in Social Security, Medicare and other programs, or an equally massive tax increase, the national debt will rise to 77 percent of GDP in 2020, 100 percent of GDP in 2030 and more than twice GDP by 2050. A great book on this subject by economists Carmen Reinhart and Kenneth Rogoff, titled “This Time is Different,” suggests that economic growth starts to suffer significantly after debts reach 90 percent of a nation’s GDP.

Some people think we can just grow our way out of the debt by cutting taxes.  But this is not really possible given the magnitude of our problem. Tax cuts appeared to work in the past, but that was primarily because we were in a period of long-term growth with the largest generation in history going into its peak spending years. That is no longer the situation.  

It’s highly unlikely that further tax cuts will do much to increase growth because taxes already are at their lowest level as a share of GDP in almost 60 years. In any case, the biggest problem businesses have today is a lack of customers, not high taxes.

When people talk about growth reducing the burden of debt they are sometimes implying that inflation will solve the problem. Many economists think if nominal GDP grows faster it doesn’t matter whether it’s due to faster real growth or higher inflation. The problem with that belief is that it assumes that the debt is largely composed of long-term bonds with fixed interest rates.

Unfortunately the portion of the national debt held in the form of long-term securities has fallen over time, and the percentage in short-term securities has grown. As of September, three-fourths of the privately held public debt matures in less than five years. This debt can’t be inflated away because investors will demand higher interest rates to compensate for inflation when it rolls over, which will raise federal spending on interest payments.

Even in the absence of higher interest rates, growth in the debt will sharply raise the government’s interest payments from 1.3 percent of GDP this year to 3.5 percent in 2020, 4.5 percent in 2030 and 10 percent in 2050. At that point half of all federal taxes will be going just to pay interest on the debt, which by law stands first in line before all other claims. In the end the debt must be paid, and we will have to raise taxes and cut spending to make sure it is.

We truly have mortgaged our future. Hopefully we will somehow come to our senses with our national debt problems and not make the problem even worse than it already is. If not, keep your eye on the canary. When the canary croaks, grab your wallet and run like crazy. Thanks for reading.



NICK MASSEY is a financial adviser and owner of Householder Group Financial Advisors in Edmond. Massey can be reached at www.nickmassey.com. Securities offered through Securities Service Network Inc., member FINRA/SIPC.