Jubak's Journal4/15/2008 12:01 AM ET
US deep in debt and still digging
You're paying for the nation's debt addiction through both direct and indirect taxes. And unfortunately, Uncle Sam is going to need more money.
By Jim Jubak
A not-so-subtle reminder that nothing in life is certain but debt and taxes:
The taxes you paid on your recently filed 1040 included roughly $4,300 to cover your household's annual share of the interest payments on the $9.4 trillion in public debt owed by the U.S. government.
That $9.4 trillion is just part of what we as a nation owe collectively. There's also the $700 billion trade deficit we ran up in 2007 as a result of importing more than we exported.
And then there's what we owe individually. Like the $950 billion in credit card debt we owed as of the end of March. And the $1.6 trillion in auto loans and other nonrevolving debt.
Face it: We live in a debt-addicted culture.
One day, the bill for all that debt will come due. That's a dead certainty. As sure as it is that the interest due on the federal debt will show up in the income tax you pay next year. And the year after.
We'll pay some of that bill directly, as formal taxes. And we'll pay some of it indirectly -- maybe even so gradually we won't notice -- as what I'd call informal taxes, such as lower living standards and a sinking U.S. dollar. But pay it we will. (Unless we somehow boost our productivity so that we get rich fast enough to pay off our debt out of our "extra" wealth. That's the only alternative I can see that will break the connection between debt and taxes.)
I'm going to spend today's column depressing the hell out of you, I hope, by describing how deep a hole we've dug for ourselves. I'll spend my next column explaining how we could be -- but so far aren't -- using investment in infrastructure to get out of this pickle.
A hard habit to break
You'd think the collapse of the housing bubble would have taught Americans to use less debt. People are, after all, losing their homes when they can't pay their monthly mortgages.
Well, you thought wrong.
All the numbers say the average debtor in the U.S., now unable to pull cash out of his or her house by refinancing a mortgage, is running up home-equity debt and credit card balances instead. Average balances on home-equity lines climbed 8% in the first quarter of 2008 from the first quarter a year earlier, according to Moody's Economy.com. Average balances on credit cards were up almost 10% in the first quarter.
The geographical pattern of this buying is absolutely predictable: Home-equity and credit card borrowing is rising fastest in those areas where home prices have dropped the most. Credit card balances were up 15% in the first quarter in California and Florida, and up 20% in Nevada.
The numbers also say this extra debt isn't going for handbags at Coach (COH, news, msgs) or cases of Bordeaux. Credit card companies are reporting that the fastest growth is in categories such as groceries and gasoline. People are using debt as a bridge, it seems, in the hope the economy will recover before they have to make deep cuts in their spending.
It's not clear that this bridge will run far enough for most people. Debt is rising just as real wages -- that's wages after inflation -- have stopped growing. The annualized growth in real wages, in fact, turned negative in October, according to the Economic Policy Institute. (See my April 1 column, "Where's the bailout for Main Street?")
Video on MSN Money
Tax-time reality check
Why aren't the presidential candidates talking about taxes? The debate about making the Bush tax cuts permanent is a sideshow, MSN Money's Jim Jubak says. The real worry is how we'll cover the rising costs of things like health care, national defense and debt payments.
So it's no wonder that late payments are rising and that more Americans have fallen behind on consumer loans than at any time in nearly 16 years, according to the American Bankers Association. In the fourth quarter of 2007, the percentage of loans at least 30 days past due rose to 2.65% from 2.23% a year earlier. That's the highest rate of delinquencies since the first quarter of 1992.
Not like the good old days
We all know what will happen if the economy stays soft long enough for folks to run out of bridge. People will cut back where they can -- and even where they can't. They'll rediscover habits of getting by. They'll gradually change their behavior and hunker down until the economy picks up again.
The big worry, however, is that the good times, when they return, won't be as good as those in the recent past. Inflation, in effect a tax on income, is likely to kick up because of a combination of rising global commodity prices, inflation in global manufacturing centers such as China and big increases in money supply created by central banks fighting the recent financial crisis.
The dollar is likely to continue a gradual long-term retreat, thanks to the U.S. trade deficit and low U.S. interest rates. Rising prices for imports will add another tax on income. And productivity looks like it's falling from historically high rates between 1995 and 2005 to lower (if more normal) rates. Productivity, which grew by 2.6% a year from 1995 to 2000, grew just 1.8% in 2006 and 2007. That's still a healthy rate of growth. It's just slower.
Continued: Say goodbye to tax-free retirement accounts
With all these informal taxes at work, there will be less left to pay the interest on the debt we've run up as individuals.
The government owes even more. But it has two huge advantages over individual consumers: It can print money, and it can raise taxes.
When the government prints more money, it is another one of these informal taxes. Printing more Treasury bills, notes and bonds is easy, but selling them to investors already holding $9.4 trillion in Treasury debt is a lot tougher. To make the sale to an increasingly skeptical overseas market, the U.S. government will have to pay higher yields. That pushes up U.S. interest rates and slows growth in the U.S. economy because companies have to pay more for the capital they need to expand or maintain their businesses. Less growth takes money out of your pocket just as effectively as higher taxes.
Tax-free retirement accounts? Uh . . .
That brings us to the question of formal taxes. No politician now running for office will say it, because it means election-year death, but it's hard to see how taxes won't go up.
The needs of an aging population alone guarantee it. Health spending will grow faster than the economy, by a huge 1.9 percentage points annually, according to the Centers for Medicare and Medicaid Services. Public spending on Medicaid and Medicare will grow by 8% annually in 2017 as the baby-boom generation hits the peak of its health-care consumption.
The total present value of Medicare, Medicaid and Social Security benefits over the next 75 years is $43 trillion. That's about three times the size of the entire $14 trillion U.S. economy today.
Think an outright repeal of the alternative minimum tax is in the cards? The AMT, a tax designed to catch wealthy tax dodgers, increasingly hits middle-class taxpayers. But repealing it would cost $806 billion to $1.4 trillion from 2007 through 2016. The fiscal 2009 budget that President Bush proposed in February includes a $400 billion deficit and no money for fixing the AMT beyond 2009.
How about new sources of formal taxes? Over the long term, I believe governments follow the advice of famous bank robber Willie Sutton. When asked why he robbed banks, Sutton is reported to have said, "Because that's where the money is."
Where's the biggest pool of money the government could tax? How about 401(k)s and individual retirement accounts. There's more than $4 trillion invested in IRAs alone.
Investors currently expect taxes on this money will be deferred (if the money invested came from pretax income) or nonexistent (if the money came from after-tax income). But what Congress put into law, Congress can take away in a new law. Think the politicians will be able to keep their hands off this pot of cash when the debt crunch really hits, sometime after 2015? I wouldn't bet on it.
And any increase in the taxes on these nest eggs would play havoc with the retirement plans of millions of people. I've yet to see a retirement calculator that includes the possibility that retirement accounts could get hit with some kind of tax surcharge.
How to keep taxes low
What's the best way to keep formal and informal taxes as low as possible?
Well, you could hope that a rogue scientist at a secret lab somewhere has produced a new strain of genetically altered politicians who would double over in excruciating pain whenever they're asked to vote for wasteful spending.
Video on MSN Money
Tax-time reality check
Why aren't the presidential candidates talking about taxes? The debate about making the Bush tax cuts permanent is a sideshow, MSN Money's Jim Jubak says. The real worry is how we'll cover the rising costs of things like health care, national defense and debt payments.
Short of that, though, I'd put my hopes on the power of faster economic growth to produce a bigger economy so that current levels of taxation are enough. Think that's a wild dream?
Well, I've actually got a scheme that could work. It's one that the governments of the fast-growing economies of China, Russia, Singapore and others think enough of to invest billions.
It's called infrastructure. And that's the topic of my next column.
Meantime, buck up. According to the Tax Foundation, Tax Freedom Day -- the day each year when you've earned enough to pay all your federal, state and local taxes and start working for yourself again -- is only a week or so away, on April 23.
Continued: Developments on a past column
Developments on a past column
"Food-crunch 'fix' won't work": Sometimes the global economy works in strikingly perverse ways. You'd expect, for example, that higher prices for rice, wheat and soybeans would cause farmers to increase the acreage they plant. That's indeed the way it's working in the United States, where farmers have planted more acreage this year than in any year since 1984, according to the U.S. Department of Agriculture.
But in developing economies, the story is very different. There, higher costs for fuel, seed and fertilizer have led farmers to cut back on planted acreage. The promise of higher prices for crops harvested in the future doesn't work if you can't afford the materials you have to pay for now, especially when credit comes at ruinous interest rates -- if it's available at all. Farmers in these areas also don't have access to the commodities futures market, so they can't lock in today's higher prices for future grain delivery.
That means paying today's high costs is too big a gamble for poorer farmers, who can't afford to bet that grain prices will be as high tomorrow as they are today. All this has led to situations like this one: In Pakistan, farmers will produce a smaller wheat crop this year because they've cut their use of fertilizers after a 50% price increase in the past year.
Meet Jubak at The Money Show
MSN Money's Jim Jubak will be among more than 100 investment experts on hand for The Money Show in Las Vegas, May 12-15. You can hear from the experts in more than 250 free workshops while sharing tips and tricks with other active investors. Admission is free for MSN Money readers.
To sign up, call 1-800-970-4355 and mention priority code No. 009554, or register online.
Editor's note: Jim Jubak, the Web's most-read investing writer, posts a new Jubak's Journal every Tuesday and Friday. Please note that recommendations in Jubak's Picks are for a 12- to 18-month time horizon. For suggestions to help navigate the treacherous interest-rate environment, see Jubak's portfolio of Dividend Stocks for Income Investors. For picks with a truly long-term perspective, see Jubak's 50 Best Stocks in the World or Future Fantastic 50 Portfolio. E-mail Jubak at jjmail@microsoft.com.
At the time of publication, Jim Jubak did not own or control shares of any equity mentioned in this column.
Stock Picks
Jubak's Picks
Check out Jim's top stocks for the next 12 months.
Jubak's How To Start
Read how to invest with Jubak's showcase portfolio.
50 Best Stocks Today
See Jim's list of the 50 best stocks in the world for the long term.
Future Fantastic 50 Stocks
See Jim's reader-assisted Future Fantastic 50 portfolio.
Dividend stocks for income investors
See Jim's new portfolio to help navigate the treacherous interest-rate environment.
Talk about investing with Jim Jubak on his MSN Money message board.
Long term investing
(23 messages)
Where Were You When The Lights Went Out?
(17 messages)
Housing mess ARe we blaming the right reasons
(8 messages)
More Growth in OTC Derivatives the "Frankenstein's monster" of Finance - Bloomberg Articles
(4 messages)
rovo's Trading Diary -- Q2 2008
(65 messages)
Recent Articles by Jim Jubak
A better way to fight low yields 04/11/2008
Food-crunch 'fix' won't work 04/08/2008
Market 'reforms' a gift to Wall St. 04/04/2008
More...
Search for a Jubak's Journal article by topic or stock symbol.
Enter search terms:
MSN Money Video
Today's Pick
Hedge fund nightmare tackles NFL players
Scam alert! Retirees at risk
MoneyTrack: Payday loan trap
Bogus real estate deals
Jim Jubak's videos
WSM: CEO insights
Kiplinger's Kip Tips
MoneyShow.com
Wall Street Journal
Morningstar's Picks
NEW! MoneyTrack
more... |
