Have you ever seen the 1993 classic Groundhog Day ? If you haven’t, please stop reading and rent the movie. If you have, you may need to view it once again to cheer you up after today’s entry. Groundhog day is certainly one of my favorite movies starring Bill Murray. In it, “Murray plays Phil Connors, an arrogant and egocentric Pittsburgh TV weatherman who, during a hated assignment covering the annual Groundhog Day event in Punxsutawney, finds himself in a time loop, repeating the same day again and again. After indulging in hedonism and numerous suicide attempts, he begins to re-examine his life and priorities.” In the end, he makes the right choices, beats his demons and finds love. By the way, Ground Hog day in Pennsylvania is an American classic that is on my travel list. The town of Punxsutawney displays the following sign:
Anyway, living through the same old event over and over reminds of the almost annual debt ceiling debate. Once again, the federal government faces a debt default unless there is political agreement to borrow more funds from future generations. In a simple cartoon, the issue is quite clear:
As you can see below, the US federal government keeps racking up the debts and every time the official credit limit is reached, it requires political will to increase borrowing. It is truly amazing to observe a once linear curve turn exponential. In fact, according to the US debt clock , the current federal debt per US citizen is $53,544. What is even more stunning is the fact that the US government has nearly tripled its entire debt since 2001 which stands just under $17,000,000,000,000 as of today:
As I have been in finance my entire professional career, I have noticed one universal mathematical truth. Every graph that goes from linear to exponential eventually stalls and leads to trouble. In fact, the beauty in math is that it is indeed universal by nature and so I googled a chart for “airplane stall” and found this:
Apparently, this is the chart to explain how to create airplane stalls in airshows. Do you see any resemblance with the chart above?
The bigger problem
As you may remember, Detroit filed for bankruptcy just a few months ago. The debt load had finally become so large that even interest payments were impossible to make. Unfortunately, adding the unfunded liabilities to the federal on balance debt leads us to an astronomical $218,000 per citizen. Of course, this is only the debt per citizen balance for the federal debt and excludes all state, local and private debt in the US.
So why has the US government not defaulted as Detroit was forced to do? Former Chairman of the Federal Reserve Alan Greenspan explained it perfectly in 2011 when he said that “The United States can pay any debt it has because we can always print money to do that. So there is zero probability of default” . By printing money, the increased service of the debt burden is placed upon the saver and retiree by transferring the purchasing power of his/her savings/pension to the federal government and the receiving entities of QE. How long can this transfer of wealth continue? According to the late Margaret Thatcher “The problem with socialism is that eventually you run out of other people’s money [to spend].” More pragmatically, this agenda can continue as long as currency markets are (kept) calm, bond markets (kept) tame and cash holders remain willing and able to pay the price.
How close are we to the tipping point? According to the US debt clock , the total assets per capita in the US are $331,000. Total household debt is about $15,000,000,000,000 or $50K per capita. Add corporate/state/muni debt of just under $30,000,000,000,000 or $100K per person to the liability(see chart below for breakdown) and we find ourselves having assets of roughly $331K per person facing liabilities of an estimated $218K + 50K + 100K = 368K per person. If we apply sound accounting to the entity at hand it must be concluded that the US is currently bankrupt. In itself, bankruptcy is not the end of the world but it is about time that we identify the problems and deal with them before the financial markets take away the printing press and expose our issues in an extremely painful fashion to all of us.
Another great way to see the madness in the numbers is to watch the video below where a middle class American walks into a bank and wants to address his credit problems by raising his credit limit. Enjoy…
While I am no politician, we may want to listen to the wise words of the quite elder statesman, Cicero, who said the following in 55BC:
Finally, let us hope that a happy ending will be found to the fiscal problems that face America. In Groundhog Day, Bill Murray finds love and inner peace after all his struggles.
Perhaps, John Boehner and Harry Reid will do the same, symbolically speaking of course…