Debt-Triggered Collapse

On the sustainability of democracies as people help themselves to the public larder

Five years ago, I reached out to folks at JP Morgan to discuss a concern.

It had seemed to me — with Social Security, Medicare, and Medicaid alone taking up 45% of all government spending — that our democracy couldn’t vote itself out of entitlements, that it would be politically infeasible for anybody to be elected on a platform of reducing debt.

America is like a Macy’s during a riot. The front windows are broken, and now everyone is helping themselves to a 4K TV.

So I requested a one-hour call with JP Morgan. They brought three different experts onto the call:

• A currency specialist

• A government debt specialist

• A senior investment advisor

My question was simple: how does the US get itself out of a debt spiral? I asked this in 2021, years before the topic became mainstream, because it had seemed to me, from first principles, a matter of great mystery. Specifically, my plebeian non-finance mind could only think of three ways to get out of national debt:

1. Raise taxes

2. Cut spending

3. Print money

(There’s a fourth phantom way, to “grow ourselves out of debt,” but a refutation is coming below.)

Moar Taxes

It doesn’t seem democracies are, in general, capable of voting for people running on a platform of raising taxes (except during wars).

Well, there are plenty of politicians who are perfectly successful running on the idea of raising taxes bigly on a tiny slice of the population. This, of course, is very popular in democracies — because let’s make those people pay! They don’t deserve the money anyway.

Let’s suppose we take 5% of the wealth of all billionaires in America. Nobody needs three commas anyway.

After all, US billionaires own $8.2 trillion worth of stuff! So, let’s take 5% of that this year, which is $410 billion. That’s a whole lot of money. And that’s from just 902 people! Nobody else would need to pay more taxes.

There’s one important detail, though. The US government spends a bit over $7T a year. So taking a one-time 5% haircut on all billionaires’ wealth pays for — drumroll, please, for those less mathematically inclined — 21 days of government operations.

And here I’m ignoring several other important factors, like the inconvenient reality that you can only commandeer wealth so many times before there’s nothing left, or the fact that a lot of that wealth is only on paper (i.e. won’t liquidate for what you think it will).

Don’t get me wrong — $410B is a lot of money. It’s only a pittance when put alongside our populace’s appetite for spending.

How about raising taxes on more citizens? Did you know the bottom 40% of households in America don’t pay federal income tax at all? How about getting some of them to pay?

Setting aside any leanings you might have toward progressive tax structures, there’s a pragmatic problem: the bottom 40% of households in America own 2% of the nation’s wealth. So even taxing 100% of their wealth will do nothing towards reducing our debt.

Alert readers are no doubt now asking the obvious: if billionaires can barely make a dent on our debt, and another 40% of the population can’t either, how did we ever get into spending so much more than the nation can possibly afford?

Cut Spending

When I came to America in the ‘80’s, Republicans were the party of fiscal conservatism and balancing the budget. Democrats, in my lifetime, have always prided themselves in the dollar amount of any bills they pass (i.e. More Spending = Better Society).

But since around 2000, both parties have converged on increased spending and forsaking all fiscal discipline. They just disagree on how to spend it. One party wants even more government-run programs. The other wants reduced taxes.

Ignoring fiscal discipline is understandable because people love it. More stuff? More money for me? Sign me up.

Guess how much our national debt is, per American?

(I’d literally like you to guess — it’s more interesting this way).

I’ll write it backwards here to avoid insta-spoilers: naciremA rep 000,011$.

That’s right. Our national debt is enough for every 4-person family to own this house in Omaha, outright, with no mortgage and no monthly payments:

Our national debt is equivalent to every family in the US owing an additional mortgage on the house above... when nearly 40% of the country can’t even pay an unexpected $400 bill in any given month. It’s worse than that, though. The debt is not only that huge, but growing an additional 6% a year. Meaning that family of four owes an additional $26k of per-capita debt every year… when the median household in America makes $84k/year.

The growth in our debt — not the debt itself, but merely its growth every year — is 31% of household income.

I’m not sure if anyone is paying attention anymore, because once enough zeros and percentage signs make it into any article, most people’s eyes glaze over. I’ll just throw in one more thing.

Merely paying the interest on our national debt is now costing us more than the entire defense budget every year. And that’s saying a lot — because we spend 3x the amount of the next-militarily-spendiest country ($1T vs. China’s $314B).

I’ve hopefully convinced you we need to cut spending. And drastically. You say you’re up for it. So let’s take a look at what we can cut.

Here is how the US spends its total budget:

• Entitlements: Social Security / Medicare / Medicaid: 45%

• Debt interest: 14%

• Defense: 13%

• Other “mandatory” programs (federal civilian & military retirement, SNAP, SSI, unemployment, veterans benefits, etc): 8%

For our alert mathematically-inclined readers, that means there is only about 20% of the budget which is even in the conversation when it comes to considering what to cut. Every single government expenditure that’s not listed above falls into that 20% (e.g. National Parks, air traffic control, etc).

Let’s suppose you’re willing to cut it all — the entirety of non-entitlement, non-“mandatory” government spending. That’d do just a bit more than pay our debt interest for that year.

This is how severe the problem is.

Grow It Out

The same type of person who says things like “the tyranny of OR” and “why not both” will no doubt now state the obvious — and the understandably popular: “Why not just grow our way out of the debt? Earn more, basically?”

Indeed, AI enthusiasts and pretty much the entire state of California thinks we can “live off the fatta the lan’.”

This argument is so appealing because it doesn’t require we raise taxes or cut spending. We can have our cake and eat it too! We’ll just bake more cakes! Heck, America is the world’s foremost bakery!

What makes anyone think, when we do grow our economy greatly, that we’ll suddenly get fiscal discipline and use all that sweet, sweet growth to pay down the debt? The US is already the world’s wealthiest country. We’ve shown that, even with all that wealth, we’re willing to spend far more than we earn. If it’s politically infeasible to pay down our debt under current dire circumstances, how will we ever choose to pay it down when we get a windfall of new AI money?

This mirrors my skepticism around the fundamental premise of consumption smoothing, the idea that you shouldn’t live impoverished as a young professional only to try to spend gobs of money as an elderly retiree, that you should instead peanut-butter your spending more evenly throughout your life.

The argument is logically sound but psychologically naïve. Sure, it makes sense to not save overly much when you’re young, only to lack the health to adequately enjoy your increased savings by the time you’re old. But here’s the problem: I don’t think anyone who spends relatively lavishly in their 20’s is going to maintain the steady discipline of not spending more as they earn more in their 30’s and 40’s. A person who starts life by spending more than they earn is likely to spend even more as they earn more.

This is my fundamental problem with the “grow our way out of debt” argument. It’s politically naïve to think we’ll do with that extra money any differently than what we’ve done with the money we already have — which is to spend (more than all of) it.

We are a nation that spends 34% more than it earns every year. AI making us an extra $3T does not mean we suddenly get fiscal religion and pay down our debt. We are the 22-year-old driving a BMW i8 while working at Panda Express. You think we’ll settle for anything less than the Lambo when we suddenly get a job at Goldman?

Stay Puft

Which brings us back to the only three ways to get out of our debt spiral:

1. Raise taxes

2. Cut spending

3. Print money

If it’s politically infeasible to raise taxes or to cut spending, the only way remaining is to inflate ourselves out of the debt. The government owes you $2,000/month for your military retirement? No problem! We’ll give you $2,000/mo! And your buddies! Everybody gets $2,000/mo!

Remember our national debt is at a level where you and your family have gotten much more than a car you didn’t pay for… unless the car you’re thinking of is a brand new Ferrari 849 Testarossa.

One great thing about owning a fiat currency is that you get to run the money printers whenever you like, for however much you’d like. If the government doesn’t want to default on its obligations to its citizens, it can just magically create “more money.”

That’s in quotes, of course, because Econ 101 explains the problem with simply printing money whenever you feel like.

You get inflation. Because printing money doesn’t mean there’s actually “more stuff of value” in our nation. It just means we have more pieces of paper representing the same fixed basket of actual goods we’ve always had. So each piece of paper is worth less.

But the nice part with printing money is that most people aren’t econ majors. They’re happy as long as the check they receive every month has “$2,000” printed on it. They don’t ask how much that $2,000 buys. (Well, the few that do, once they figure out $2,000 doesn’t buy what it used to, launch into suggestions of taking, say, 5% of every billionaire’s wealth… or “charging other countries” some tariffs).

Inflation is coming. Instead of laying out some careful proposal for how to avoid it, I’ve here outlined why I think it’s inevitable given the state of our democracy, short of a hot war shaking up our domestic snow globe traumatically.

Fireside True Story Time™: My conversation with JP Morgan five years ago started with my confusion about what seemed to me the political impossibility of avoiding a debt crisis in America.

It ended with me just as confused. The many experts on the call showed me fancy charts and talked about things like our privileged position as the preferred international reserve currency, total monetary supply, etc. I had to sheepishly admit to them, after 60 nonstop minutes of fancy finance terms, that I still didn’t understand the argument they were making against inflation.

I ended up selling a bunch of stock and putting 25% of everything I owned into gold. One JP Morgan advisor literally stifled a chuckle as he said, full of earnestness, “Philip — nobody has bought gold for 40 years.”

I still have that gold.

I am not a financial advisor. Past performance does not guarantee future returns. Your mileage may vary. Professional driver on a closed course. Ask your doctor. Etc.