In 2001, my wife and I bought our first home. We were fortunate to save enough money and put down 20% on the home. This allowed us to avoid paying Private Mortgage Insurance on the remaining 80% owed to the bank. It is hard to describe the amount of fear I had prior to this large purchase. I kept thinking of possible scenarios that could cause us to be unable to make our loan payments, and what that could mean for our family’s future. Following the purchase of our home these fears quickly faded and we were able to comfortably make our payments with enough income for other needs. Despite the fact that the fear quickly faded, I will never forget that feeling. Today I often have similar fears regarding our country’s ability to make payments on our national debt.
Before I share the current situation regarding our country’s national debt, I think it is important to share my opinion regarding our government’s spending policy. If I was the guy calling the shots, our politicians would have to balance the budget every year with very few exceptions. To be fair, there are many intelligent people who have countless objections to my belief system. This opinion stems from my conservative nature that originates from my Scandinavian heritage, which mentally blocks the neurons in my brain from accepting excessive debt loads.
To understand the scope of the national debt issue our country faces, it is important to narrow the scope of the issue that will be addressed. The issue: Can our country afford to make our national debt payments, or in other words, can we afford the payments on the government bonds that are used to finance our national debt?
Presently the payments on the government bonds used to finance our national debt represent 9.8% of tax revenues, which is lower than at any point in the 1980s or 1990s when they peaked at 18.4% of tax revenues.1 Historically speaking this data, when viewed in isolation, would imply that we are in good standing to be able to afford our debt payments for years to come. This seems to be substantiated by the fact that the US Government can borrow at approximately 2% for 10 years at the present time. This 2% interest rate is the world’s way of saying ‘we are not worried about the United States defaulting on their debt payments’.
People looking at this issue differently, may argue that the only reason our payments are so low when compared with the 1980s and 1990s, is due to the low interest rate environment that we are in. This is a fair argument. If interest rates increased, it would also increase the percentage of tax revenues needed to go towards servicing the payments. However, even if a 10 year government bond’s interest rate went up 100% from 2% to 4%, the payment would only increase by 10%.
This topic could get far more complex than what I chose to share in this month’s newsletter. For simplicity purposes, I chose to focus on one aspect of our country’s finances. Without introducing additional complexity, it is fair to share that at the present time I agree with the investors’ of the world, there is very little concern for our country’s ability to service our debt. Despite this agreement, I still feel that our government would be far better off if we had unilateral political party acceptance of fiscal policies that focus on an annual balanced budget with very few exceptions.