The Debt Dilemma and US Economic Leadership

The US appears to be in a very positive macroenvironment economic environment with declining inflation, a solid jobs market, and the Dow, S & P, and NASDAQ all at or near record highs.  Americans have over $40.0 trillion in 401k’s, IRA’s and pension funds and the value of the US housing market has nearly doubled to $50.0 trillion over the past decade. Yet, the economy was the top concern in the recent election… why?        

Concurrently in our solid economy, taxpayers are burdened with paying $82.0 billion in monthly interest expense to service our $35.0 trillion National Debt.  We finished the recent fiscal year with a $1.8 trillion budget deficit and the Social Security trust fund is running a $100 billion annual deficit and will be depleted by 2033.

Reportedly, 61% of Americans are living paycheck to paycheck, 35% have maxed out credit cards and interest on household debt accounts for 31% of total expenditures.   Debt is a national epidemic impacting consumers, driving higher interest rates, and creating a huge risk to US economic wellbeing and leadership. 

Spending cuts and tax increases are two obvious methods to address the federal deficit.  However, there never seems to be the political will to implement these.  As an alternative, should the US Treasury be seeking better returns on taxpayers’ invested capital to close the budget gap?  Would tax-funded programs like retirement or educational savings accounts make sense now to avail equity investing growth opportunities to defray debt and shore up social security?     

US Household Wealth Distribution & Spending

To provide some context, Figure 1 highlights how American families have fared financially over the past 10 years.  According to the Bureau of Labor Statistics:

·       The median family household income grew 50% from 2014 to 2024

·       Household expenditures on essentials grew 45% from 2014 to 2024

·       Cumulative inflation grew 28.6% over the last decade

·       As a percentage housing, transportation and healthcare are roughly the same

Interestingly, median household revenue grew slightly faster than expenditures and well above the 10-year cumulative inflation rate, which should indicate more discretionary consumer spending availability.   On the surface, American families are making more and keeping more of their pay and spending slightly less for essentials than 10 years ago.  If that is true, why the discontent and why is the economy our largest concern?       

Debt Dilemma

As an indication of the US debt dilemma, even some Americans making $150,000/yr. are living paycheck to paycheck.  For many Americans, excessive debt obligations above paying for household essentials are keeping us from saving and investing to get ahead.  Unfortunately, the US government is no different.

Consumer debt stands at almost $18.0 trillion with US mortgage debt at $12.5 trillion and accounting for 70% of consumer debt.  Financing appreciating assets like real estate is practical.  However, with current mortgage rates close to 7%, Americans are paying over $500 more per month on a $300,000 mortgage compared to 5 yrs. ago.  Americans also owe over $1.1 trillion on credit cards, $1.6 trillion in student loans, and $1.6 trillion on auto loans and are paying even higher interest rates.  

On the federal level, the US economic state is equally or more severe as the discrepancy between federal revenue and spending continues to grow.  Since 2008, US debt has grown from 39% of GDP to over 100%. In 2023, the Federal Government took in $4.47 in revenue and spent $6.16 trillion.  Our national debt stands at over $35.0 trillion, and we are spending $982 billion In interest payments alone which represents over half of the FY2024 budget deficit.  Our government’s current financial situation is analogous to a family making $100,000/yr. spending $138,000 per year including $10,700 in credit card interest (when they should be spending $67,000) AND carrying a mortgage balance of $783,000.   Limiting the government’s ability to borrow excessively and better leveraging of tax dollars to produce higher returns makes sense.   Paying nearly a trillion/yr. in interest expense means that money is not invested in technology, infrastructure, education, or social wellbeing.  Until we fix the US consumer and government debit crisis, the US will never be (financially) great and most US taxpayers will never (feel) financially great.

The Wealth Gap

Financial statistics such as median family income and expenditures don’t tell the whole story.   Since the 1980’s the range of geographic and demographic wealth distribution in the US has continued to widen with many more people doing worse over the last 10 years.  The underlying causes of the “Wealth Gap” are complex and include offshoring of higher paying manufacturing jobs, declining trade unions, stagnant minimum wages, educational access, and racial and gender discrimination.  Recent data show that the top 10% of earners had roughly 67% of the US wealth while the lower 50% of earners only had 2.5%.  Surprisingly, there are more net worth millionaires now in the US than families in lower income brackets (<$56,000/yr.).   Racial wealth gaps are also stark, with black families owning only about 23% of the assets and Hispanic families owning about 19% of the assets compared to white families.  In addition to wealth gaps associated demographics, geographic wealth gaps are widening in metropolitan areas, the Northeast and along the coasts.  And of course there is a huge generational wealth gap between Baby Boomers, Millennials and Gen Xer’s with Baby Boomers owning 52% of US wealth despite comprising only 20% of the population.  While the wealth gap in America has been growing for the last 40 years, it has really accelerated in the last decade for a few obvious reasons: asset inflation driven by investments and home equity for higher income segments of our population and the burden of consumer debt disproportionally affecting the middle and low income segments of the population.  In reality, while a small portion of the population is getting significantly wealthier, many more people are doing worse and paying more for living expenses. 

Asset Inflation       

One key accelerator of the wealth gap in the US is “asset inflation” including, the savings, investments, pensions, and property values held by wealthier Americans.  As shown in Figure 2, the Dow has grown 148% over the past 10 years, the S & P 189% and the NASDAQ, 296% and housing prices have nearly doubled in the US over the past decade.  Bitcoin, which had a value of $320 at the end of 2014 recently hit $100,000. For Americans, assets in 401k, IRA’s and corporate pension programs grew from $21.7 trillion in 2014 to $40.0 trillion in 2024.   Individual 401k assets vary widely, with a median account balance of $35,000 and only 14% of all Americans have more than $100,000 in their retirement plans.  As of June 2024, approximately 500000 Americans had $1.0 million in their 401k’s and 400000 had more than $1.0 mil. in their IRA’s.  For these individuals who save and invest and are getting double digits returns, wealth accumulation is well above the inflation rate.     

Assumptive Accounting

For the American consumer and US government, we spend like the next pay raise is just around the corner or that the next administration will fix the debt crisis.  Meanwhile, as US debt increases, treasury yields increase pushing up financing costs, impacting the US credit rating, (which was downgraded in 2023), as well as mortgage and credit card rates.  Over 50% of the federal budget deficit is attributed to servicing debt we already accumulated.  In 2023, 21% of the federal govt. budget went to fund social security ($1.35 trillion).  We are currently running a $100.0 billion deficit with social security and at current rates, the $2.8 trillion trust fund will be completely depleted by 2033.  At that point, if not sooner we will have a choice of a 20% benefit reduction or a payroll tax increase from 3.3% to 4.02% on wages.  Before the end of the year Congress is expected to vote on the Social Security Fairness Act which will extend Social Security benefits to public sector workers who receive a government pension and worked a second job where social security taxes were collected.  This will accelerate the depletion of the trust fund.  Wealthy Americans, with sizable private pensions and investments may think so what?  But when the US credit rating gets downgraded again, invests will take a dive, bond yields will spike, and everyone is affected.   

How a Sovereign Wealth Fund Could work

The definition of a sovereign wealth fund (SWF) is a pool of government money that is invested in assets to provide a cushion against economic shock or deficits.  Sources of revenue include exported oil, natural resources and energy, bank reserves and budget surpluses.   Some US states have SWFs such as Texas, Alaska, and New Mexico.  Norway’s SWF, the world's largest, is valued at over $1.0 trillion and retuned over 20% last year.   If the US could attain even a 10% return on its $2.8 trillion Social Security trust fund, we could close the $100.0 bil. SS revenue gap and retain $180.0 bil./yr.  Currently, Social Security taxes are primarily invested in low yielding US treasury securities.   

Certainly, there is risk in investing in equities, commodities, or mineral rights.  However, Americans regularly invest in these assets with many types of pre- and post-tax savings accounts for their long-term benefits.  Regulated accounts such as 401k’s, IRA’s and Educational Saving Accounts that are allowed to invest in equities to generate growth.  Social Security deductions could be similarly deployed as one potential way to build better financial futures for Americans.   While there is potential investment risk, the alternative of letting our deficit grow out of control, and social security running out of funds are avoidable financial disasters that requires political resolve and urgent federal action.