The following is a guest post by Murray T. Holland.
The National Debt: How This Single Issue Can Hurt the Economy and Each of Us
By Murray T. Holland*
I wrote A Nation in the Red as a call to action for concerned citizens to save this country before we become inexorably caught in the debt trap that has collapsed the economies of so many countries. Moms and dads, and especially moms and dads of children in their teens, twenties and thirties (this is the generation that will shoulder the burden of this debt), need to become informed of the problems that this much debt creates and make an issue out of it with all your friends, colleagues, schools and businesses. That is the action step that each concerned parent must take.
Most Congressmen and women and many people operate under the misguided belief that an economic depression cannot happen here and that somehow the laws of economics do not apply to the United States. But they do and it has happened here and will happen here if we the people do not take action and stop the growth in the national debt.
Today, we have a pile of debt that equals the debt we had in 1945 after World War II. That debt was 120% of GDP. Including unfunded pensions, we exceed that amount. It took 35 years of economic growth and very little additional debt to get the debt/GDP ratio back to 35%. Today, we are near this level but are not operating anywhere near a balanced budget: so the problem keeps getting worse.
Interest expense on the national debt will trap the United States. The zero interest rate environment we have today masks the underlying problem. When we return to normal interest rates (6%), our interest expense will jump from $360 billion/year to $720 billion. This will worsen the deficit and investors will ultimately stop lending, forcing a balanced budget. In order to balance the budget, we will see increased taxes and spending cuts which will create a recession that can spiral into a depression. We are watching these laws of economics right now with depressions in Spain, Portugal, Greece, Argentina and close behind Italy and France, all brought down by excess debt.
What the average person will experience during a depression is simply a much worse version of what we are experiencing now: millions more will lose their jobs, wage rates will decline significantly and those who are dependent on a growing economy will be hurt. People living on investments can lose a large portion of those investments with a market decline. Many types of business thrive and many types fail. If the government starts printing money to pay for the debt, we may experience hyper-inflation. This affects every person differently. The poor and unemployed will suffer the most. Individuals should assess their own circumstances to determine what will happen to them.
On a personal level, everyone is affected by an economic depression. Marriages and children are put off. Families take in relatives and friends, everyone hoards money so the economy continues to decline. Most people, and in particular the poor and those who cannot find work, become hopeless. We can prevent this scenario here in the United States but we need the moms and dads to take action and make this issue the foremost issue of our time: we ultimately need new leaders with the courage to change the path of our government.
*Murray T. Holland is a 30-year veteran of the finance industry and managing director of Dallas-based MHT Partners. He is the author of a Nation in the Red (McGraw Hill, October 25, 2013).