The Destruction Of The US Economy Is A Mathematical Certainty

The average American generally evaluates the strength of the economy by looking at the stock market, gas prices, and employment numbers. This isn’t how you truly gauge the strength of the U.S. economy. There are a number of complex issues and numbers.

But one thing is for sure…

The average American knows something is wrong. They can’t quite pinpoint it because they are not well versed in economics, finance, etc. But things aren’t adding up and their standard of living is noticeably decreasing.

Shadow Inflation Is Making Your Income Worthless

Well, we can help identify some of the factors resulting in this decreased standard of living. Below is a list of household staples and their increase in price since January 2006:

As of April 26, 2016

Yes we know this list was a bit of overkill but you get the general idea, right? A majority of Americans consume these household staples on a daily/weekly basis and these items have shot up in price over the last 10 years.

This in itself wouldn’t be a cause for concern because naturally we expect inflation to occur. But here is the problem…

Real U.S. wages have DECREASED by 5% since 2006.

That was not a typo. Our expenses have gone up tremendously in price yet the purchasing power of the average household has decreased by 5% over the same time period.

We know you might be scratching your head and wondering why you haven’t heard this argument anywhere else. You might even be under the assumption wages have increased over the years, but that’s not the truth.

First and foremost, what you have likely seen or heard are the reported numbers regarding the median household income in regards to “nominal growth.”

Simply put, nominal growth is the actual number that has been reported. For example, if we pay our children $20 for mowing the lawn in 2015, then decide to pay them $25 for the same task in 2016…

They received a nominal growth in salary of 25%

May 2016 - Income Nominal

Source: United States Census Bureau: Historical Table H-6 United States Median Household Income All Races

As you can see, nominal growth in median household income has increased by approximately 11%

Even the U.S. Government acknowledges we simply cannot measure the growth of household income without taking into account the amount of inflation in our country. Therefore they created The Consumer Price Index for All Urban Consumers (CPI-UC) to account for the rising cost of living.

The principle is very simple, say for instance you made $20,000 in 2014 but had $5,000 in living expenses. In 2015 however, you made $40,000 but paid $10,000 in living expenses. Your income doubled but your expenses doubled as well, therefore there has been no “real” increase in income.

Below is a true depiction of U.S. Median Household Income

May 2016 - Income Real

Source: United States Census Bureau: Historical Table H-6 United States Median Household Income All Races

Some can and will argue the U.S. Government’s methods used for adjusting Median Household Income for inflation are flawed. But quite frankly, you don’t need to be an economist or rocket scientist to figure this out. A nominal increase in U.S. incomes of 11% coupled with household staples averaging increases of approximately 37% equates to your standard of living going down.

The problem in America is simple…

The average American is seeing their wages increase but their cost of living increasing at a much faster rate.

Think about it for a moment, as federal employees we have only seen a pay increase of 2% over the last 5 years. How much have your expenses gone up since then?

Current Interest Rates Are Robbing You

Additionally, you have to take into account what interest rates have done over the same time period.

May 2016 - Interest Rates

Source: US Department of the Treasury: Historical Treasury Bill Rates

During this same time period interest rates for American savers has plummeted. To put it in perspective, a retired couple who had $1 million dollars in savings back in 2006 earned $44,000 a year. However, that same retired couple will only earn $5,800 on that same $1 million dollars in 2016.

When we say “savings” we are referring to U.S. Treasury Bills, which are backed by the U.S. government. We consider these bills the lowest risk in regards to savings options.

That being said, where else are retired couples going to find low risk savings options which provide a reasonable return on their investments? In theory they are being forced to invest into the stock market in order to provide reasonable income to finance their cost of living.

What will happen to these retirees when those investments go south?

What Most People Don’t Understand About Our National Debt

You’ve likely heard the countless arguments about our national debt spiraling out of control. It’s true…
Our debt has tripled in the last 20 years but you have to understand debt in itself is not a bad thing.
May 2016 - National Debt

Source: White House Office of Budget Management: Table 7.1 Federal Debt At The End Of The Year

If you were to buy a house, make a couple renovations, maybe purchase some furniture chances are you’re likely to finance all of those things. But you’re not really worried about the price tag you’ve accrued in terms of dollars, you’re mainly concerned about being able to make the monthly payments.

Right or wrong in terms of sound personal finance, this is generally how most decisions are made in the average American household. The same holds true for the U.S. government.

Instead of worrying about the price tag of all our obligations the United States is only worried about making the payments on those obligations. The official name for these interest payments are called “net interest.”

As you can see, our current net interest is projected to double by 2020 and triple by 2023.

How will the U.S. government make those payments? Will they continue to borrow more money? Will they default on their loans/obligations?

These are questions, we certainly don’t have the answer.

But ask yourself…

  • What would happen if your car payment doubled?
  • What would happen if your car payment tripled?
  • Could you still afford to own that vehicle?

The likely answer is no. Realistically speaking, the car would likely be repossessed or the bank who lent you the money would lose their investment. The same holds true for the United States and its creditors.

We are quickly approaching a time where a significant amount of our revenue will be spent on paying interest instead of programs for the American people.

The Truth About Our Revenue & Expenditures

Some of you may be thinking, “The U.S. government simply needs to make more money in order to pay its obligations.”

You are correct, let’s take a look at how U.S. revenues have grown over the last 20 years.

From this chart you can see U.S. revenues steadily increased 125% over the last 20 years.

But what about expenses? Have those grown at the same pace?

May 2016 - Expenditures

Source: Congressional Budget Office: Historical Budget Data March 2016

It turns out expenses have grown at a similar pace of 138% over the last 20 years.

So what’s the problem?

When expenses are greater than our income we have a deficit and in order to make up for those deficits we simply issue more debt…

Think about it this way.

Imagine you had a credit card and could not make the payments. Instead of saying “I’m sorry I cannot make the payments,” you simply make the payments with another credit card. Thus putting yourself in even more debt but at least you are current on all your payments.

Does that make sense to you?

Where Exactly Does All The Money Go!?

At this point you’re probably wondering “What are all the expenditures of the United States Government?” There has to be a good reason we continue to spend more than we earn every single year.

Here is the breakdown of the U.S. budget in a nutshell. This is where every dollar in federal taxes goes and even the dollars we borrow.

  • Medicare, Medicaid, Etc = 30%
  • Social Security = 27%
  • National Defense = 18%
  • Income Security = 15%
  • Net Interest = 7%
  • Transportation, Education, Other = 3%

Source: US Department of the Treasury: Financial Report of the United States Government 2015

As we pointed out earlier in the article Net Interest payments will start to steadily increase over the coming decade. They will double in 2020 and triple in 2023.

In simple terms…

Not only has our debt grown out of control but we are now approaching a period where making interest payments may become a challenge.

Entitlements Will Be The Death Of America

A cryptic and somewhat selfish statement…

…but a true one.

As it stands Medicare/Medicaid & Social Security are the two largest expenditures of the U.S. government. Together they account for over half of our annual spending.

  • Medicare – Health Insurance program for citizens 65 or older
  • Medicaid – Health Insurance program that assists low income families
  • Social Security – Provides benefits to retired and/or disabled citizens

Not only do these programs account for over half of our spending but millions of Americans depend on them.

If two of the largest U.S. expenditures being entitlements doesn’t scare you perhaps this will…

As it stands now, we spend $1.03 Trillion on Medicare/Medicaid and their costs are projected to increase 34% by 2020 and almost double by 2026.

In regards to Social Security, we spend $882 Billion and costs are projected to increase 30% by 2020 and almost double by 2026.

Source: Congressional Budget Office: 10 Year Budget Projections March 2016

And in the Social Security Administration’s (SSA) own words…

“In 1940, the life expectancy of a 65-year-old was almost 14 additional years; today it is almost 21 years.”

“By 2035, the number of older Americans will increase from 48 million today to 79 million.”

“There are currently 2.8 workers for each Social Security beneficiary. By 2035, there will be 2.1 workers for each beneficiary.”

But the most important statement of all from the SSA…

“The combined Old-Age and Survivors Insurance and Disability Insurance Trust Fund reserves are still growing and will continue to do so through 2019. Beginning in 2020, the cost of the program is projected to exceed total income, and the trust fund reserves will begin to decline;

The projected point at which the combined Trust Fund reserves will become depleted, if Congress does not act before then, comes in 2034 − extended one year from the estimate in last year’s report” ~ Social Security Administration Annual Performance Report 2015-2017

Just to be clear these are not our words. We do not make these statements with tin foil hats, it is all public information.

The undeniable fact is Medicare, Medicaid, and Social Security as we know it today will be gone or significantly changed in our lifetimes. Unfortunately, it will not likely be for the better and a lot of retirees will suffer because of it.

Student Loan Bubble & Soon To Be Crisis

While we definitely don’t enjoy it, we will continue to address the problems America faces in the near future. The last thing we want is for individuals to be blind sided when all this comes to fruition.

Most of us remember the housing crisis. But do you know how it was created? Below is a short clip summarizing how the mortgage crisis started and unfolded in America…

If you don’t have time for the video. Please understand, at the most basic level the U.S. Government was willing to insure home loans for unqualified individuals.

We can see the same problem today with student loans…

The U.S. Government has stepped in and become the primary lender of student loans.

May 2016 - Federal Direct Loans

Source: US Department of Treasury 2006 – 2015 Financial Reports

As you can see, almost a third of the U.S. Government’s assets are compromised of Federal Direct student loan debts. Please let that sink in for a moment.

And just to be crystal clear, we’re not making this or any other of our arguments in support of one political party or another. In fact our overall problem has been contributed to by both parties, they both write checks they can’t cash. Government intervention is well intended but typically results in less than desirable outcomes via 2nd, 3rd, and 4th order effects. Quite frankly, a genuine and honest politician would run on the economic platform of raising taxes and cutting expenses.

But that simply doesn’t get you elected in America.

  • When we hear a politician tell the public they’re going to forgive student loan debts… we know they’re lying.
  • When we hear a politician tell the public they’re going to cut taxes… we know they’re lying.

And now you will too!

Last but certainly not least the student loan crisis might be coming to a head. Consider this…

At almost $1.3 Trillion in loans outstanding to the U.S. government, student loan debt is almost 3 times larger than all the debts of Greece. Essentially, hundreds of billions of these loans were made to unqualified students who attended college and now hold degrees that are essentially worthless.

The Wall Street Journal recently reported bombshell statistics regarding student loan defaults…

“While most have since left school and joined the workforce, 43% of the roughly 22 million Americans with federal student loans weren’t making payments as of Jan. 1, according to a quarterly snapshot of the Education Department’s $1.2 trillion student-loan portfolio.

About 1 in 6 borrowers, or 3.6 million, were in default on $56 billion in student debt, meaning they had gone at least a year without making a payment. Three million more owing roughly $66 billion were at least a month behind.

Meantime, another three million owing almost $110 billion were in “forbearance” or “deferment,” meaning they had received permission to temporarily halt payments due to a financial emergency, such as unemployment. The figures exclude borrowers still in school and those with government-guaranteed private loans.

The situation improved slightly from a year earlier, when the nonpayment rate was 46%, but that progress largely reflected a surge in those entering a program for distressed borrowers to lower their payments. Enrollment in those plans, which slash monthly bills by tying them to a small percentage of a borrower’s income, jumped 48% over the year to 4.6 million borrowers as of Jan. 1.”

But wait there’s more…

“These delinquency rates likely understate the effective delinquency rates, because many student loans are in deferment, grace periods or forbearance and are temporarily not in the repayment cycle. The implications of these alarmingly high rates is not immediately clear, especially given that many student loans cannot be shed in personal bankruptcy. However, a large share of young borrowers saddled with severely delinquent loans may inhibit aggregate economic growth as this group is unable to participate in other economic activities, such as buying a home or saving for retirement. ” ~ The Federal Reserve

We wish there was a more professional way to say this, but to be blunt, when the Federal Reserve is using terminology such as “alarmingly high” rates you should know things aren’t going well.

If We Had A Crystal Ball

As we always tell our subscribers, nobody knows for certain what is going to happen and how everything will play out. The only thing we can do is remain vigilant with our analysis and act accordingly when an opportunity or situation presents itself.

Some may argue we can significantly alter our obligations or find another avenue of increasing revenues but we believe America is mathematically beyond that turning point. A dramatic change has to occur and it will be catastrophic for the majority of Americans no matter which avenue the government pursues. Things are going to get a lot worse before they get better.

Please understand America will go on but we believe a very tough time period is on the horizon and we’re doing everything we can to make sure our subscribers are prepared for it.

Here’s to our Wealth!

1 Comment


    Reply Reply October 17, 2016

    Very good article, it’s sad that our government seems to only think of themselves and will promise anything to people just to stay in office. They of course will probably not be affected by this because they will vote themselves exempt from any of the bad times ahead. But I wonder how many of there family members and friends will be affected. Keep us in the positive on our investments and maybe we will be able too ride the storm!!

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