In my last column, I discussed the sad fact that half of American households today have a negative net worth. They are worth less than zero. Their total debts exceed their total assets.
Some see this as a problem only for those families who find themselves in this predicament. Not so.
Those of us who have lived within our means, worked, saved and invested realize that the majority of these folks haven’t exercised thrift, budgeted well or used credit wisely.
But that’s not how many of them see it. They prefer to believe that capitalism is broken, the economy is rigged and “the American economy isn’t working for most Americans.”
And they vote. The result is a dangerous and growing political movement: “free-lunchism.”
Economist Milton Friedman famously said that there’s no such thing as a free lunch. But millions have learned that something is as good as free if someone else is paying for it. And that “someone” is generally employers and taxpayers.
With the 2020 elections in full swing, politicians have proposed an astonishing array of free lunches:
- Medicare for all
- Free college tuition
- Student debt forgiveness
- Paid family leave
- Universal basic income
- A government jobs guarantee.
And many others… This, of course, is on top of other expensive proposals like the Green New Deal and a trillion-dollar infrastructure plan.
I’d be happy to go along with all this if the government were a massive candy dispenser funded by folks from – I don’t know – Mars?
But the government is not a candy dispenser, and it has no money except what it forcibly collects in various taxes from individuals and their businesses.
There is wide agreement that we live in an age of extreme political polarization. The two major parties can’t agree on so much as what to have for lunch.
Yet there is one area where there is universal consensus: That the American people should have a large, generous welfare state and not pay for it.
The federal debt now exceeds $22.3 trillion. Our current unfunded liabilities for Social Security and Medicare alone – growing by trillions of dollars a year – top $124.4 trillion.
For comparison purposes, that latter number is more than one and a half times the GDP of the entire planet.
Consider Social Security. It will draw down its assets starting next year. And the program’s trustees project that it will be insolvent in just 16 years.
Ask President Trump and his Democratic rivals what they plan to do about it. You’ll hear nothing but crickets.
Former Sen. Alan Simpson told The New York Times last week, “Nobody in politics, and I mean nobody, really wants to deal with Social Security a second before they have to.”
Medicare’s finances are in even worse shape. Its main trust fund is expected to reach insolvency in just seven years. At that point, it will be able to pay just 89% of its bills.
What is the Republican plan to fix this? There isn’t one. Trump has vowed to not touch entitlement programs.
The Democrats’ plan? Extend Medicare to everyone, hastening the financial emergency.
It used to be that politicians at least paid lip service to the growing national debt. Now neither party acts as if there is a crisis brewing.
Yet there is.
The nub of the problem is that the people doing the spending – elected officials – will not be doing the repaying. Their primary goal – the primary concern of all politicians – is gaining, holding and wielding power.
Promising to raise taxes (except on “the rich”) or cut benefits is not conducive to that goal. So they don’t even pretend to have a plan to make trade-offs or match revenues with expenses.
This is partly because the debt problem “doesn’t poll.” The Pew Research Center recently found that only 48% of the public consider deficit reduction “a top priority.”
Yet it should be. Our rising national debt threatens the economy, the dollar, our standard of living, even national security.
And this can’t help but have profound ramifications for the financial markets and, of course, your investment goals.
The debt is not going to become a national emergency this week, this month or this year, of course. But it is steadily worsening each day.
And there is a growing consensus among the smart money that it will take a full-blown financial crisis – perhaps one considerably bigger than the last – to force politicians to act.
How much time do we have? That will be the subject of an upcoming column.
In the meantime, save as much as you can, for as long as you can, starting as soon as you can.
Then manage it as if your way of life and retirement depend on it. Because they very well may.
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