For the first time in history our federal government has more than $20 trillion in outstanding debt. If you think, “It’s the government’s debt, not mine,” think again. The U.S. national debt is, in part, the money that each of us owe a portion of as a taxpayer whether we like it or not, and it’s a big number that affects everybody in one way or another. So, how did we get here? And how can you protect your finances from what’s to come?
How we hit $20 trillion
When history like this is made, there tends to be a lot of finger-pointing. Who's to blame? The main culprit behind the rising debt is growing federal spending, especially among Social Security, Medicare, Medicaid, and the Affordable Care Act, though the bulk of the existing debt dates back much further.
MarketWatch’s Robert Schroeder points out that no single political party nor leader is necessarily responsible. Instead, a culmination of factors created a perfect storm of dollars and cents. Key moments in the debt’s trajectory include:
- President Ronald Reagan’s 1981 tax cuts: Reagan signs major tax cuts that reduce the federal revenue by an average of $118 billion a year during the first four years.
- President George W. Bush’s 2001 and 2003 tax cuts: Individual income taxes are cut, as are taxes on capital gains and dividends. It’s estimated that the cuts account for approximately $5 trillion of the outstanding debt.
- Spending on wars in Afghanistan and Iraq: War is expensive. These two wars account for about $2 trillion of the debt, estimates consultant Kathy Ruffing via MarketWatch.
- The Great Recession and its aftermath: The Federal Reserve embarks on four phases of quantitative easing, buying up Treasury notes and mortgage-backed securities to increase the money supply and give the federal government more money to spend. By 2014, the Fed has another $4.5 trillion of debt to its name, notes the Balance. Tax cuts, stimulus programs, and bank bailouts add another $1 trillion to the debt through fiscal 2016, reports the Committee for a Responsible Federal Budget via MarketWatch.
Less money coming in, more money going out. It’s a recipe for financial ruin. Federal healthcare programs like Medicare, Medicaid, and Social Security, and interest on the debt are responsible for 83 percent of the projected increase in spending over the next decade, reports Romina Boccia, deputy director of Thomas A. Roe Institute for Economic Policy Studies.
Dave Ramsey posted this tweet in 2015 when the national debt topped $18 trillion, but it remains nonetheless relevant: “Key to winning with money. Live on less than you make! Act your wage. Quit spending like you are in Congress.”
How the debt hurts everyone
Is $20 trillion more than an attention-grabbing headline? It sure is, but it’s just the tip of the iceberg. $20 trillion is the portion of the debt that’s legally binding, notes U.S. News & World Report. The government owes about $100 trillion more in unfunded liabilities, that is essentially money the government has promised to people but “will not be able and isn’t legally required to pay.” This is money that would be primarily used to fund Social Security, Medicare, and veteran benefits. Sadly, even the lowest estimates for unfunded liabilities “exceed the annual economic output of the entire planet.”
Apart from the $100 trillion+ catastrophe that unfunded liabilities may prove to be, $20 trillion is a number you may soon feel the repercussions of in your everyday life. You could see:
- Higher taxes: When the government can’t make revenue payments through typical means to pay off the debt, it may turn to raising taxes on consumers and property owners.
- Rising interest rates: The cost of borrowing money for everyday Americans may increase through higher interest rates. Higher interest rates make it tougher for families to buy homes, finance car payments, or pay for college.
- Lower standard of living: More tax revenue will have to be paid out as interest on the national debt. This shift in expenditures can lead to a lower cost of living, as borrowing for economic enhancement projects becomes more difficult. Bridges may go unfixed, social programs unfunded, and public institutions may fall into disrepair.
- Weaker job markets: High national debt means little economic growth. It can also mean fewer jobs are created through government spending on projects like road construction and small business loans.
- Less income: The Congressional Budget Office estimates that rising federal debt could reduce the real income for a 4-person family by as much as $16,000, on average, in 2047.
Perhaps most importantly, argues Investopedia’s Troy Adkins, “as the risk of a country defaulting on its debt service obligation increases, the country loses its social, economic, and political power. This, in turn, makes the national debt a national security issue.”
How you can protect your finances
What’s next for the U.S debt? Since it’s never risen to such levels, no one can be sure.
“Certainly if U.S. Government debt levels increase to the point where the credit of the federal government is sufficiently in question to cause U.S. interest rates to increase, economic uncertainty and volatility will be rampant,” says Investopedia contributor, Steve Hunt. This loss in confidence would also have “the secondary effect of a precipitous drop in the value of the dollar.”
What do we know? A look back at history tells us that an ensuing drop in the dollar could set up uncorrelated and negatively correlated assets, like gold, to shine.
The dollar index, which tracks the dollar against six major global currencies, has already fallen about 10 percent since January, reports BBC. Meanwhile, “gold has soared 13 percent so far this year, while other precious metals such as silver and platinum picked up year-to-date gains of six percent and four percent,” notes CNBC.
Putting an unstable dollar to work for you and protecting yourself from economic uncertainty means diversifying away from assets that move in parallel with the dollar, especially paper-based assets.
As the buying power of paper currencies erodes—in part thanks to a runaway national debt—gold prices can increase, protect, and even expand your purchasing power. To learn more about the power of owning physical gold, get your FREE copy of U.S. Money Reserve's Gold Information Kit. It includes helpful guidance for new buyers and market veterans alike.
Research suggests that gold and silver can have an inverse correlation to stocks, bonds and sometimes other commodities like oil. For example, CNBC notes that in August 2016, gold’s correlation to stocks reached a 32-year low.
Former Fed chairman Dr. Alan Greenspan has spoken out in favor of gold as a means of protection against economic turbulence. In the February 2017 issue of the World Gold Council's Gold Investor, Greenspan said that “the risk of inflation is beginning to rise…significant increases in inflation will ultimately increase the price of gold. [Buying] gold now is insurance. It's not for short-term gain, but for long-term protection. I view gold as the primary global currency.”
Even when the dollar tumbles on world markets and foreign currency prices go haywire, precious metals have been known to retain their standing in dollar terms.
In the end, how you protect your financial future is up to you. You may choose to work harder and longer to try and keep pace, shift your portfolio balance away from the dollar, or invest in personal skills and knowledge that never erode in value. Whatever you do, do something. Start by calling 1-844-307-1589 for a one-on-one consultation with an experienced Account Executive and learn how you can use physical gold to shield yourself from the debt dilemma ahead.