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Macroeconomics teaches that tax revenues can be spent on guns or butter (military or non-military goods) and apportioned between the two. The US is running a $2 trillion deficit, resulting in a debt of over $33 trillion, which is 130% of GDP. Instead of apportioning taxes (budgeting), we’re increasing debt so we can have both guns and butter. Interest on the debt is 2% and heading towards 5%, which will crowd out other expenditures and escalate deficit spending.
“Butter" represents nonmilitary goods that increase social welfare, such as schools, hospitals, parks, and roads. "Guns" refer to military goods such as personnel – both troops and civilian support staff – as well as military equipment like weapons, ships, or tanks.
But with conflicts in Ukraine and Israel, we are being told that $150 billion in military aid and other support is no problem for the mighty U.S. – that we need not worry where this money is coming from, certainly not from butter. It’s coming from increased deficit spending, so the sacrifice is not our butter – it’s our kids’ kids’ kids’ Butter. They will pay.
The U.S. is running a $2 trillion deficit, spending $6 trillion when tax revenues are only $4 trillion. As a result, our debt has swelled to more than $33 trillion, which is 130% of GDP, with nothing to slow its growth. We want guns and butter, and we can get both as long as the borrowing window stays open. This window requires greater interest payments; new Treasury issues are clearing at increasing levels of interest.
Limits
Of course, there are limits to how much the U.S. can owe, and we are testing those limits. When these limits were breached in the past by other countries, the government typically “monetized” the debt by printing more money and creating serious inflation.
War spending of $150 billion is indeed problematic when our open borders are putting economic strains on sanctuary cities like New York and Los Angeles. It’s just not fair to spend billions on other countries when we need it at home. But $150 billion pales in comparison to interest on our debt.
Interest on our debt is 2% of $33 trillion ($660 billion), which is 11% of current spending. But this interest is heading toward 5% and maybe even higher, which is $1.7 trillion if debt remains at $33 trillion, which it won’t. That $1.7 trillion is 30% of spending. That does not include the off-balance-sheet debt for Social Security and Medicare, estimated at $100 trillion by Professor Laurence Kotlikoff, Boston University in this interview. This will either crowd out other expenditures or escalate deficit spending way beyond control.
We can’t afford to pay 5% interest on a debt that exceeds $30 trillion
What spending would you reduce in the following table from Fiscal Data? You’ve got to allocate 30% to net interest, which is three times the current 11%.
When the bough breaks
There might have been a time when we could have both guns and butter, but that was long, long ago. We are facing a crisis created by decades of profligate spending. The bills are coming due, and they won’t wait for our kids’ kids’ kids.
As I’ve recommended in the past, inflation protection should be considered: TIPS, precious metals, some real estate, etc.
Ron Surz is president of Target Date Solutions, developer of the patented Safe Landing Glide Path and Soteria personalized target date accounts. He is also co-host of the Baby Boomer Investing Show.
His passion is helping his fellow baby boomers at this critical time in their lives when they are relying on their lifetime savings to support a retirement with dignity, so he wrote a book, Baby Boomer Investing in the Perilous 2020s, and he provides a financial educational curriculum.
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Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
