Buffett was wrong about this one. (Unfortunately it is the most important one of all.)
This is an issue that has become very important to me lately, and I hope readers will be patient and read through my thoughts. It is not a pleasant topic and most people would prefer to pretend the problem doesn’t exist. But it needs attention soon.
One evening last spring I took my wife to a local movie theater to see the premiere of the documentary I.O.U.S.A., the movie designed to increase awareness of the “inconvenient fiscal truth” that our nation faces. It was a great event, and was followed by a live Q&A with some of the stars, including Dave Walker and Warren Buffett.
Walker was the doomsayer, and expanded on the already strong case made by the movie that due to the national debt and other liabilities of the federal government, our children are destined to end up worse off than we are today. Buffett was the counterpoint, arguing that although it is a serious problem, America will be fine in the long run.
Buffett was wrong.
I wanted to believe the guy, my hero, the Oracle of Omaha. But the facts just didn’t support his Alfred E. Newman-esque stance. Here we are a year later, and things not only look bleaker than ever, it almost seems as if the sky has started its fall.
When Bush 43 took office in 2001, our nation had $5.6 trillion in outstanding debt. In the eight years since then, through a combination of tax cuts, wars and expensive Medicare supplements, the amount has mushroomed to nearly $11 trillion. Think about that: the balance of our national debt is climbing at an annual compound rate of 9%. And this doesn’t even include the unfunded liabilities of Medicare and Social Security, which will come due at ever increasing rates in the coming years and by most accounts dwarf our current $11 trillion in debt.
The Peter G. Peterson Foundation estimates that our “real” national debt, after accounting for all these unfunded liabilities that will presumably have to be financed by taking on additional debt, is now $56.4 trillion – four times our current GDP. Comfortably paying this off is simply an impossibility.
Now, in a misguided Keynesian approach to solving the financial crisis(which is not unrelated to the problem of government overspending in the first place), Obama and the others are spending a trillion dollars MORE of money WE DON’T HAVE. Of course, this is not a Democrat or a Republican issue. Democrats like to spend money, Republicans like to cut taxes. BOTH are equally dangerous. No one will want to do it, but what this country needs is higher taxes, lower spending and a higher personal savings rate. How the hell are we gonna pull that one off??
I don’t think we will. And that is why I think Buffett was wrong. Washington, now more than ever, lacks the political will to correct this problem. And that is why we are doomed. Sadly, what will eventually happen is the government will have to print enormous sums of new money, causing hyperinflation and prohibitively high interest rates. What it cannot do, ironically, is choose to simply default on its mountain of debt as the Russians did in the 90s. This is because the vast majority of our debt is actually owed to ourselves, via Social Security and Medicare entitlements. What a fricking trainwreck.
What I am saying is nothing new. People throw these kinds of numbers around all the time. At some level, this may even be counterproductive – people get desensitized to the enormity of problem. What we don’t hear enough about is what life will actually be like when this hits the fan some twenty years down the road. How will we be living when 75% of our GDP is committed to simply servicing our national debt? Where will jobs come from when reinvestment ceases because corporations are forced to forfeit their earnings to the government? How will the citizenship react the government is forced to confiscate nearly all the earnings of the public while simultaneously eliminating the programs upon which everyone has become so accustomed to relying? From a sociological perspective, this is terrifying. Chaos could ensue. Good thing the second amendment hasn’t been completely repealed.
Perhaps most frustrating to me is that the root of the problem seems to be something that is all but impossible to change. It is a societal attitude towards debt – the entitlement philosophy that WAY to many (though not all) Americans adhere to. I DESERVE that 52” plasma tv, because I work ten hours a day flipping burgers, and burger flipping is hard work. That kind of attitude will kill a society fiscally, because the truth is that simple hard work does not entitle you to anything more than someone else is willing to pay you for that work. If they don’t pay you enough, you need to find a way to become more economically productive so as to boost your wages so that you can afford that Cadillac Escalade only AFTER having saved for it.
It’s a chicken-or-egg situation to determine whether it is the government setting a bad example for individuals or if it’s an infiltration of the government by entitlement-minded individuals, but clearly both segments of our society have the same attitude towards debt. This MUST change.
I worry about my one-year old son, David, and what type of world he will face as an adult. For his birthday earlier this month, a good friend of mine gave him a $50 Series EE “Patriot” savings bond. I loved the message of savings and responsibility in such a gift, I only wondered if it would be in default when David goes to cash it in 2039. I tell you, I would do anything possible for my son but ensuring he lives in a prosperous economy seems beyond my control. That worries the hell out of me.
I am sure many folks will think I am wacko for this outlook, but I hope those that do take an honest look at the situation before concluding I am wrong. At a minimum we need to put ourselves on track to reverse the current trend.
*** Clarification, 28 Apr 2009***
In this post, I did not mean to imply that I think Buffett was wrong just because of what has happened over the past year. Buffett said last spring that "America will be fine in the long run" and by long-run I assume he means 30, 50 years. I just happen to disagree becuase as long as we continue this trend of enormous deficit spending ($1.7 trillion this year alone) we will not be fine in the long run.
One evening last spring I took my wife to a local movie theater to see the premiere of the documentary I.O.U.S.A., the movie designed to increase awareness of the “inconvenient fiscal truth” that our nation faces. It was a great event, and was followed by a live Q&A with some of the stars, including Dave Walker and Warren Buffett.
Walker was the doomsayer, and expanded on the already strong case made by the movie that due to the national debt and other liabilities of the federal government, our children are destined to end up worse off than we are today. Buffett was the counterpoint, arguing that although it is a serious problem, America will be fine in the long run.
Buffett was wrong.
I wanted to believe the guy, my hero, the Oracle of Omaha. But the facts just didn’t support his Alfred E. Newman-esque stance. Here we are a year later, and things not only look bleaker than ever, it almost seems as if the sky has started its fall.
When Bush 43 took office in 2001, our nation had $5.6 trillion in outstanding debt. In the eight years since then, through a combination of tax cuts, wars and expensive Medicare supplements, the amount has mushroomed to nearly $11 trillion. Think about that: the balance of our national debt is climbing at an annual compound rate of 9%. And this doesn’t even include the unfunded liabilities of Medicare and Social Security, which will come due at ever increasing rates in the coming years and by most accounts dwarf our current $11 trillion in debt.
The Peter G. Peterson Foundation estimates that our “real” national debt, after accounting for all these unfunded liabilities that will presumably have to be financed by taking on additional debt, is now $56.4 trillion – four times our current GDP. Comfortably paying this off is simply an impossibility.
Now, in a misguided Keynesian approach to solving the financial crisis(which is not unrelated to the problem of government overspending in the first place), Obama and the others are spending a trillion dollars MORE of money WE DON’T HAVE. Of course, this is not a Democrat or a Republican issue. Democrats like to spend money, Republicans like to cut taxes. BOTH are equally dangerous. No one will want to do it, but what this country needs is higher taxes, lower spending and a higher personal savings rate. How the hell are we gonna pull that one off??
I don’t think we will. And that is why I think Buffett was wrong. Washington, now more than ever, lacks the political will to correct this problem. And that is why we are doomed. Sadly, what will eventually happen is the government will have to print enormous sums of new money, causing hyperinflation and prohibitively high interest rates. What it cannot do, ironically, is choose to simply default on its mountain of debt as the Russians did in the 90s. This is because the vast majority of our debt is actually owed to ourselves, via Social Security and Medicare entitlements. What a fricking trainwreck.
What I am saying is nothing new. People throw these kinds of numbers around all the time. At some level, this may even be counterproductive – people get desensitized to the enormity of problem. What we don’t hear enough about is what life will actually be like when this hits the fan some twenty years down the road. How will we be living when 75% of our GDP is committed to simply servicing our national debt? Where will jobs come from when reinvestment ceases because corporations are forced to forfeit their earnings to the government? How will the citizenship react the government is forced to confiscate nearly all the earnings of the public while simultaneously eliminating the programs upon which everyone has become so accustomed to relying? From a sociological perspective, this is terrifying. Chaos could ensue. Good thing the second amendment hasn’t been completely repealed.
Perhaps most frustrating to me is that the root of the problem seems to be something that is all but impossible to change. It is a societal attitude towards debt – the entitlement philosophy that WAY to many (though not all) Americans adhere to. I DESERVE that 52” plasma tv, because I work ten hours a day flipping burgers, and burger flipping is hard work. That kind of attitude will kill a society fiscally, because the truth is that simple hard work does not entitle you to anything more than someone else is willing to pay you for that work. If they don’t pay you enough, you need to find a way to become more economically productive so as to boost your wages so that you can afford that Cadillac Escalade only AFTER having saved for it.
It’s a chicken-or-egg situation to determine whether it is the government setting a bad example for individuals or if it’s an infiltration of the government by entitlement-minded individuals, but clearly both segments of our society have the same attitude towards debt. This MUST change.
I worry about my one-year old son, David, and what type of world he will face as an adult. For his birthday earlier this month, a good friend of mine gave him a $50 Series EE “Patriot” savings bond. I loved the message of savings and responsibility in such a gift, I only wondered if it would be in default when David goes to cash it in 2039. I tell you, I would do anything possible for my son but ensuring he lives in a prosperous economy seems beyond my control. That worries the hell out of me.
I am sure many folks will think I am wacko for this outlook, but I hope those that do take an honest look at the situation before concluding I am wrong. At a minimum we need to put ourselves on track to reverse the current trend.
*** Clarification, 28 Apr 2009***
In this post, I did not mean to imply that I think Buffett was wrong just because of what has happened over the past year. Buffett said last spring that "America will be fine in the long run" and by long-run I assume he means 30, 50 years. I just happen to disagree becuase as long as we continue this trend of enormous deficit spending ($1.7 trillion this year alone) we will not be fine in the long run.
posted by Andy Kern at
9:39 AM
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