American existentialist philosopher William Earle (1919-1988) famously declared, “If your outgo exceeds your income, then your upkeep will be your downfall.” This basic tenant of personal financial responsibility seems forgotten by many, given the reality of how many people cannot scrape together even modest amounts of money to meet an unexpected emergency. We see debt challenges in the numbers who cannot pay off credit card balances with usurious interest rates, plus anguish over student loan burdens and default rates.
It’s a simple truth. If you spend more than you earn, never save for a “rainy day,” you will have a stressful and unhappy life. How does that basic bromide apply to governments? The Wall Street Journal (6/26/19) headlined, “Deficits May Double As Share of GDP.” America continues to spend more than we earn in taxes and fees. “Budget deficits are on track to more than double as a share of the economy,” noted the paper. Yet, the dollar is strong against most currencies in the world. How does that work?
Unlike households, states, and cities, the federal government has a monetary “printing press.” Currently our economy is the strongest on the planet. Travel to most places in the world and dollars are gladly accepted. You cannot find similar acceptance of the Chinese renminbi, Russian ruble, or Venezuelan bolívar. Once the English pound sterling was the global standard. As the British Empire receded, post-WW II the dollar ascended as the dominant global trading currency. In 1999 when the European Union created the euro, it was theorized the new currency could supplant the dollar as the global yardstick. That hasn’t happened. As recently as 2008, it took $1.58 U.S. to buy one euro. Today, it takes $1.14. Why is the dollar stronger even as we continue to pile up debt?
Think about it. At one time U.S. paper currency was redeemable in actual gold or silver. Coins contained real precious metals. No more. Notes redeemable in gold ended in 1933 and silver in 1968. Today’s paper money is backed by nothing other than “the full faith and credit of the United States of America.” Looking at all of the countries across our somewhat turbulent planet with nothing but unbacked paper currencies, which country would you prefer to lend money to if you had to? Right now, of all of the bets available, America is tops.
History teaches, as you expand the money supply, which is easy to do when currency is tethered to nothing of tangible value other than a promise, prices rise, inflationary pressures generally increase. In 2019 it takes $7.36 to buy what $1 bought in 1968, the last year the dollar was redeemable in silver — an inflation rate of 636 percent.
That was 51 years ago, you say. If you are a 20-year-old in the work force or military, or on the cusp of graduation from college, in 51 years, God willing, you likely will be retired. At the same assumed rate of inflation, your $1 million today’s retirement nest egg target will require, $7,360,000. How ‘bout them apples?
No matter your time frame, the goal of savings is to accumulate purchasing power in future after-tax dollars. The WSJ noted that America’s debt load could grow to 144 percent of GDP by 2049, up from 78 percent projected this year. The surge largely stems from higher spending on Social Security and Medicare, rising interest costs on government debt, and the 2017 tax cut. However, federal revenues have hit all-time highs since the tax reductions as our economy grew faster and more jobs were created. (www.Investors.com, 10/16/2018). We have a spending problem, not a revenue problem.
In 1968 economist Herbert Stein participated in a Congressional hearing on politicians increasing debt ceilings. Intoned Stein, “I recently came to a remarkable conclusion…and that is if something cannot go on forever it will stop. So, what we have learned about all these things is that the federal debt cannot rise forever relative to the GNP. But, of course, if they can’t, they will stop.”
Candidates running for president are promising a largess of “free stuff” for citizens and non-citizens. Some are honest enough to acknowledge that everyone, business and individuals, including the middle class, will pay higher taxes. Borrowing costs will soar. Interest rates will rise along with inflation, generating more debt pressure. Think about the impact on your future buying power, take-home pay, job prospects and job security in a potentially slowing economy, your 401(K) balance, retirement security.
Think carefully, citizen. If something cannot go on forever, it will stop.
Lewis Walker, CFP®, is a financial life planning strategist at Capital Insight Group; 770-441-3553;email@example.com. Securities & advisory services offered through The Strategic Financial Alliance, Inc. (SFA). Lewis is a registered representative and investment adviser representative of SFA, otherwise unaffiliated with Capital Insight Group. He’s a Gallup Certified Clifton Strengths Coach and Certified Exit Planning Advisor.