I’m talking about 10 myths that exist regarding the US national debt. The general theme for this was derived from a video that was done by Anthony Davies of Duquesne University. It was done about two and a half years ago. However, this blog post has been adapted to meet the issues that we’re currently facing.
When I was a child, one of the very important lessons I was taught by my parents was the importance of staying out of debt. My parents never really had much, but they also never really owed much. They believed that if you wanted something, you needed to work hard, save the money, and then buy the item once you could afford it.
Unfortunately, our federal government missed out on this teaching. What we currently find ourselves in is a situation where we’ve mortgaged the lifestyle for future generations. Our national debt is out of control. There are also a ton of misunderstandings people have about the national debt. I thought it would be good to review a few of these issues.
Taxes may be one of the biggest risks your retirement will ever face. If taxes double in order to pay all the unfunded liabilities the country has, which many people believe they will, your retirement dollars are going to run out much faster than you expected them to. You will also have issues with your guaranteed income, such as Social Security, because you’ll have less of it available to spend. High taxes can wreak havoc on any retirement plan, which is why I believe the power of zero paradigm is so critical to your current economic situation.
Myth number one: The current national debt is around $26.2 trillion. Now, if you were to go to the website USdebtclock.org, what you would find is that the current reported national debt is somewhere between $26.2 to26.4 trillion, and it’s increasing at a rate of about $1 million every 20 to 22 seconds. The national debt has been growing at a rate of about a trillion dollars a year over the last decade.
When something called the COVID-19 virus hit in February 2020, the debt began spiraling out of control ever since. I first started following the national debt clock back in about November of 2019. At that time, the amount of debt the US government was reporting was just over $22 trillion. Now, we fast forward about six months and what do we find?
The government’s already added over $4 trillion of additional debt, and I expect for them to add an additional 3 or $4 trillion in debt by the end of this year. As high as this amount may seem, this is only part of the story.
Why is it only part of the story you ask? Because the US government is not required to use fiscal gap accounting, which is the method of accounting used to report the future obligations the government has. When you start accounting for the unfunded liabilities such as Medicare, Social Security and debt payments on the national debt, the real numbers are estimated to be somewhere between 100 trillion dollars and $200 trillion. Yes, that’s four to eight times more than what we’re reporting on the books. In an effort not to ruffle any feathers, I’m estimating the true national debt to be right around the middle at $150 trillion, which brings me to my next myth.
Myth number two: The government owes $150 trillion.. I know I just told you the government owes $150 trillion. That’s only for the liabilities related to the debt the government provides some sort of accounting for on their financial statements. What it doesn’t include the debt that is owed by a number of other federal agencies that do not report their liabilities on the government financial statements.
For these other various federal agencies, the total amount they owe is somewhere around eight trillion dollars. It also does not include the outstanding debt owed by many of the states, which many people believe the US government will someday be responsible for picking up. The total miscellaneous state debt is somewhere around $5 trillion and growing at an astounding rate because of COVID-19. In addition to the $150 trillion I mentioned in myth number one, we can now add an additional $13 trillion to this number.
Myth number three: Money borrowed from Social Security isn’t debt because we are borrowing from ourselves. The biggest takeaway here is that there is no “ourselves” when you talk about the federal government and Social Security. It’s kind of like when I was younger and I’d go out somewhere with one of my friends, and they would do something stupid and get caught. What was the first thing they tried to promote? That we did it. No, there was no we; there is you. I had nothing to do with your bad decisions.
Social Security is its own program operating out of its own fund. The program is dependent upon the interest payments from the US government to ensure it continues to operate in the black, which by law it must do and currently does. Social Security derives almost all of its revenue from payroll taxes, taxes on Social Security benefits, and the interest it receives on the money that was borrowed out to the US government. Now, all this being said, the Social Security fund does have its own set of financial problems that will come about somewhere around 2034 and 2035. These problems can and will be solved by raising taxes, cutting benefits, or a combination of the two.
Myth number four: The government can’t go bankrupt. Technically, this is true because the government can simply print more money. Effectively, this statement is completely false. Because anytime you print more money, you create inflation, which causes spending power to decrease. When we talk about printing more money, it’s as simple as supply and demand.
Let me give you an example. Let’s say with current dollars, the cost of a hamburger is $5. Cost of a pair of shoes is $50. The cost of a car is $25,000. What happens if the government were to increase the supply of money by printing double the dollars we currently have? If they were to do this, there would be a larger supply of money but the same supply of goods and services. Because of demand, the cost of those items would have to double. Instead of a hamburger costing $5, it would now cost $10. The cost of a pair of shoes would now cost you $100, and the cost of that car would increase to $50,000. Even though you have more money, you have the same buying power, which means you’re in the same position you were when you started, which is six of one and half a dozen of the other.
The other real problem with inflation is it is a tax on your savings. Every year inflation goes up, your savings loses buying power. Let’s assume you have $100,000 in your savings account and inflation is 3% per year. Within a period of just 10 short years, the buying power of your hundred thousand dollars is now only $70,000. I really hope, prosperity nation, you’re starting to see the problem that is created when the government prints more money. It doesn’t work out well for your future retirement.
Myth number five: The government can solve its problem by raising taxes. No, the government can’t solve the problem by raising taxes because the government can’t raise taxes. They can only raise tax rates. When we look at the history of taxes, what we find is that even though top marginal tax rates have been as high as 94% at times, the government still brings in about the same percentage of revenue each year, which is about 17%. When taxes get too high, people start finding loopholes and end up lowering their tax back down to what they feel comfortable paying.
Myth number six: The government should increase taxes on the rich because they aren’t paying their fair share. There are two main problems with this statement. First, there are not enough rich people to make a difference. The rich only make up about 6% of the US population. What’s been proven is when the government increases taxes on this group of people, it has a reverse effect, and the government collects less money, not more money.
There are two schools of thoughts with this. One is that the rich are able to hire good accountants and attorneys to help them lower their taxes and find additional loopholes. The other is that the rich are not as motivated to create additional revenue because so much of it is being lost to taxes. Either way, the government isn’t winning the battle from this strategy.
Now, the second issue you have is the term fair. What has been determined fair by a large percentage of the US population is that the poor should pay about 2%, the middle class should pay about 15%, and rich people should pay somewhere in the neighborhood of 30%. Now, this all sounds good on the surface. However, when we pay taxes, there are goods and services we get in return from the government.
What we find is that the rich are the only ones who are paying a share, not even their fair share. When you add government benefits to what the poor pay in taxes, What they’re really paying is a negative 56% in tax, they’re getting a much higher benefit than what they’re having to pay for. The middle class is paying a negative 15% in tax, and the top 1% is paying a positive 34% in tax. When you look at the data, what you find is that only about the top 40% of American earners are net payers into the tax system.
That’s why we have a national debt crisis to begin with. Next time you start arguing about no more tax cuts for the rich, remember that every tax cut only applies to the rich because any other tax cut is just an additional refund for those who are getting more back from the system than they’re paying in.
Myth number seven: The government can settle all of its debts by selling off its assets. Remember that big number I mentioned at the beginning, that $150 trillion plus what the US government owes and current and future obligations? Well, it turns out this seems to be a bit of a problem when we start considering selling off all our assets.
The US has three main assets that you could consider selling off. The first one is their gold, which is about 8000 tons. Sounds like a lot, doesn’t it? The second is their land, which equals about 500 million acres. The third is the other miscellaneous property that the US government owns. Now, this may seem like a lot of stuff, but in reality, if you combine all three of these assets together, what you get is about $3 trillion. Yeah, just over 2% of what is owed on current and future obligations. Selling assets isn’t something we should be considering anytime soon.
Myth number eight: The government needs to pay off its debts as soon as possible. Well, the good news here is the government doesn’t need to pay off their debts. It operates very much like your household. All it needs to do is make sure it has the income needed to service the debt, which is where the bad news comes in. If you take even a 2.5% interest rate on $150 trillion of unfunded liabilities, what you find is the amount of interest is $3.8 trillion a year. This is the amount the government must pay.
The amount of revenues the government brings in on an annual basis is just about $3.3 trillion. You can see the problem. It will leave us no other income to fund Medicare, national defense, or any other program that the government needs to run, which is one of the big arguments for the belief taxes must go up in the future because debt is definitely not going to be going down anytime soon.
Myth number nine: The government can keep borrowing. This is another area where the government ends up having some of the same problems that you and I have with our own family’s finances. If you’ve ever been over leveraged in your lifetime, you know, it can be near impossible to borrow money. Even if you can borrow money, you have already burned through all of your easy sources of cash such as your friends and family. The government has the same issue.
They’re already over leveraged and are quickly running out of places to find more money to borrow than the Social Security fund. It has no additional money. The US population, they’re not as interested in loaning money at a rate they have been in the past. Foreign countries and individuals are also starting to take a step back. Who that leaves is the Federal Reserve, and what happens when the US government borrows money from the federal reserve? They subject the country to inflation, which then doesn’t do anything to solve the problem, just puts the problem into a different can, so it can be kicked farther down the road by politicians.
Myth number 10: There is no way to fix the problem. Many people out there would like you to believe this is true, but prosperity nation, you need to know I’m not a man of doom and gloom. I am a man of faith, and I believe we have better days ahead. It turns out, there is a solution. We can have a balanced budget within as little as five years.
Now, this is going to take Congress doing something they’ve never been willing to do before. That is to cut all spending by 10%. I know this is the last thing on anyone’s mind right now. But let’s believe there’ll be a day in the future, we get through all these economic challenges that we’re currently in and can get back to the form of normality. When that happens, if we’ll just cut the budget by 10% and then hold spending consistent for a period of four years – this means no adjustments at all, even for inflation – then what we’ll have is a balanced budget. Once we have a balanced budget, we can then start working on eliminating the debt that has built up over the last century.
Now, it’s not going to be a quick fix, but it took us over 100 years to get here. We need to be willing to realize it will take us decades to get out of where we are now. One final thought, you currently have an opportunity that many people have never had in the history of America. That is a period with historically low tax rates and a knowledge of when taxes will go higher, which is January 1 2026.
My recommendation, prosperity nation, is that you don’t waste this time. If you’re not already in the zero percent tax bracket for your retirement, you need to take the time now to get yourself there. It’s my belief we’ll never have a time in our lifetime with a better opportunity than we have right now.