Updated: Jun 21
Creating Wealth is an in-depth conversation between Bill Taber, an experienced financial advisor, and his millennial daughter about personal finance, investing, and financial planning.
Bill Taber is President of TABER Asset Management, a Registered Investment Advisor (RIA) and fiduciary firm located in Des Moines, Iowa since 1998. For decades, Bill has provided investment management services to clients, creating wealth, building wealth, growing income, and preserving capital for each and every client. TABER offers personalized asset management, wealth management, retirement planning, financial planning, and services such as 401(k) rollovers.
His daughter, Anastasia, works in accounting at a global law firm in Washington D.C. She enjoys discussing finances and her cats’ latest antics with her dad.
Episode 6: Everyone has a vague awareness that the U.S. national debt is a problem, but exactly how big of a problem is it and what does it mean for the average citizen? Bill and Anastasia discuss how the pandemic has exacerbated the issue and what steps people can take to address it.
For those wanting a refresher on how the economy works, Bill mentions a highly informative 30 minute video done by Mr. Ray Dalio on economicprinciples.org. Mr. Dalio also participated in an April 2020 TED Talk on how the pandemic is affecting the global economy, available to view on ted.com.
For questions and comments, you can email us at email@example.com.
Anastasia: Welcome to Creating Wealth, I’m Anastasia.
Bill: Hi, I’m Bill.
Disclaimer: The views expressed today are our own, solely for informational purposes, and it is not an offer to buy or sell, or a solicitation of an offer to buy or sell any security or instrument or to participate in any particular investment strategy. The views are subject to change and are not intended as a forecast or guarantee of future results.
Anastasia: Today, we’re going to talk about the national debt. We hear that the national debt is very large and my question is why should we be concerned about it? So I think first, maybe, we should talk about what is the definition of debt, or country debt, and how is it similar or different from personal debt?
Bill: Well, the definition of debt is when your expenses exceed your income and you have to borrow money to pay for those things that you’ve purchased. So, the U.S. government taxes a portion of everyone’s income and that’s what they receive in revenues. On the expense side. their biggest expenses are entitlements such as Social Security, Medicare, Medicaid, also includes the defense budget, and a number of other smaller items. When those expenses exceed revenues, they need to issue debt to pay for it. For example, before the virus hit this year, they were anticipating receiving roughly $3.5 trillion dollars in revenues from taxpayers, but their budgeted expenses, or actual expenses, were around $4.5 trillion.
Bill: That excess of (-$1 trillion) in this year is what’s called a deficit, an annual deficit, and when you add those together with other years of deficits it creates the total federal debt. It represents basically things that Congress has paid for without first earning the money, or taxing the money from us to pay for it. And that is how it’s similar to personal debt.
Anastasia: That makes a lot of sense. I see the debt clock in random areas, like they have one running a few blocks from the White House. I’ve seen one when I’ve gone back to Des Moines, especially before they had the caucuses, I saw that they had the national debt on one of the billboards. So I think it’s something that a lot of people are aware of--I also just went to the usdebtclock.org and we are currently at (-$24.94 trillion) in debt.
Bill: --My my my...
Anastasia: --which seems insane to me. I remember seeing this video which explained what a billion dollars was, it showed you visually after explaining what a million dollars was, it went up to a billion. And I think that we can hear these terms like million, billion, trillion and people don’t really have a visual understanding of what, like how much money that is. But the fact that we have multiple trillions of dollars in debt seems really bad.
Bill: Yeah, a trillion is essentially one thousand billion.
Anastasia: And a billion is (laughs)--
Together: --one thousand million. (Both laugh)
Anastasia: So, it’s one million, million. (Laughs) Which seems quite large. I think people are aware that, “This is a bad thing, but I don’t know,” I mean, at least even for myself, I’m not sure why exactly this is bad (laughs). Like what does this mean for the average citizen to have such an enormous national debt? How does that affect us?
Bill: Well, let me give you an analogy to an individual situation. What happens when you borrow money to pay for something that you want now and then you can’t pay it back? What typically happens is that whatever you bought, whether it’s a car or a house, is taken from you. In addition to that, no one wants to loan you any money in the future, because you didn’t pay back the previous money. So the net effect of that is that your standard of living drops and that you have fewer options and less financial flexibility. And in the case of the government, the government winds up having to spend more of your current dollars that are going to them in taxes for spending that they’ve done years ago or in the past, which then limits their ability to spend money on current needs. So for example, we have a road and bridge system in America that badly needs to be repaired. It’s been 60, 70 years since there’s been a major overhaul on that. The fact that the government has this amount of debt and has to pay interest to those that hold the debt is going to keep them from having sufficient funds to be able to do those kinds of projects. And that all has a big impact on people’s individual standards of living.
Anastasia: Do you have any idea how much interest we’re paying?
Bill: I don’t, but it’s on the internet. There’s been some “help” from the standpoint that interest rates have been falling in recent years that the government has not had to pay out as much. But the fact that they are now borrowing big time to keep the economy going during this virus situation ultimately will lead to higher inflation which will lead to higher interest rates. And that’s when the portion of what goes in your current tax payments to pay for the interest expense on the debt gets very problematic.
Anastasia: So I just googled it, and for 2020, the interest on the debt is $479 billion dollars.
Anastasia: And that is roughly 10% of our budget.
Bill: So out of every dollar that they’re taxing you today, roughly 10 cents of it is paying for things that they bought in the past.
Anastasia: That seems insane.
Bill: And that’s not 10 cents that they can use for things that are needed now or in the future.
Anastasia: If we are on this current trajectory where we’re adding to the national debt and it doesn’t go down, what is the endgame?
Bill: Well, the endgame again is a dip in a standard of living. The same thing can happen to cities and counties and states and many foreign governments, but the world’s financial system right now is currently based upon the U.S. dollar. And that was established after World War II, in a system that basically allows the U.S. Federal Reserve Board to print, (quote unquote print), more dollars that the government spends more than it takes in revenues. And so we are now reaching a level of debt that is as high as it has ever been in U.S. history. It has zoomed past, just during this period, 100% debt to GDP.
Anastasia: What does that mean?
Bill: Debt is, as I said, the excess of money that you’ve had to spend over what you’ve taken in income. GDP is called gross domestic product, and it basically represents a dollar figure of all the goods and services that are provided by U.S. consumers and workers in the country in a given year. So it represents all of the productivity of American workers. And when that debt ratio reaches 100% of what those goods and services that are provided each year, it’s essentially the same as saying that you have a $200,000 house that has a $200,000 mortgage against it. In other words, there’s absolutely no ownership or equity in it. And with this situation with the virus, and the borrowing that they’re having to do to keep the economic machine going so that more tax dollars can continue to come into the government in the future, they’re taking that debt up to a level of 120% of debt to capital, which is essentially saying that with your $200,000 house, you now have a $240,000 mortgage on it, which is basically not sustainable. So despite the fact that the current system allows the U.S. government to print money to alleviate short term financial stress, we’ll begin to see consequences of a lower standard of living for coming generations. And that’s a concern I have for you as a next generation and for your children as the generation after that, that it’s just not sustainable and our leadership needs to start to do things now to reverse it.
Anastasia: You talked a little bit, you touched a little bit on the timeline for this. I mean, I think we all know that this is the highest level of debt that we’ve ever had as a country, but when did this really start becoming a problem?
Bill: It is really becoming a problem now. It’s kind of like you’ve got your feet in warm water and it’s in a pot (laughs) and they’re slowly slowly turning up the burner underneath the pot, and you don’t really notice it until suddenly it becomes a huge issue and then there’s a fire.
Anastasia: Do you think that’s what’s going to happen?
Bill: That’s exactly what’s starting now and it’s going to continue to happen over the next two to three years. It’s going to require a policy response on the part of our leadership, both executive and legislative, to start doing something about this. I read here last week that the trustees for Social Security and Medicare have said because of the virus that the date that the Social Security system will run out of money has now been pushed up from 2035 to 2029, which is just nine years from now. And the date that the Medicare system will basically run out of money has been pushed up to 2026, which is six years out, and they said under a worst case scenario it could be in three years.
Anastasia: What happens when they run out of money?
Bill: Well, what I’m saying when they run out of money basically is that in the past they had some surplus, they had some funds they can draw on, and so at those points in time those surpluses would be gone, and the only thing that would be paying for those services going forward would be the current taxes that you’re paying from income taxes and payroll taxes into the system. And so in the case of Social Security, it doesn’t mean that what you’re paying into today is going to go away, but in 2029 the expected benefit that you would receive would drop from $1.00 to about 79 cents. And in the case of Medicare, one dollar that would be used for medical expenses would drop to roughly 90 cents.
Anastasia: So anyone who has been including those numbers in their retirement planning or their financial planning, people are going to need to rethink those numbers.
Bill: Rethink them and consider how they can basically come up with funds themselves through savings and investments to make up that difference.
Anastasia: It really just puts more of an onus on people to be making their own money to support themselves in retirement, or-- that’s just tough. (Laughs) This is a crappy situation. (Laughs)
Bill: (Laughs) Well, it requires that people think about this and right now with the virus and the huge amount of debt that exists not only with the U.S. government but just pretty much across the world, is that it’s really a good time to consider - what are needs vs. wants? I know that we’ll talk about this in another podcast, but how do you build your own savings, and how do you start to prioritize necessities over luxuries in life. And think about how you can be more thankful or appreciative of the basics in your life that are taken care of, and in the process of doing that, put more of an emphasis on making sure that if we go into another situation like what we’ve had with this virus, that you are in a position where you have enough cash saved in emergency funds to get through it and not put yourself or your family in peril for not having the funds to be able to pay the rent or to buy food.
Anastasia: So you’re saying that the debt is a problem now and we should be taking action now. I assume that that action--the onus of that is on politicians, but is there anything that we can do about this very, very large societal issue?
Bill: Well, yes, the onus really is on our political leaders to be responsible. And so, for example there is a group out there, it is a nonpartisan group called the Committee for a Responsible Federal Budget (crfb.org) and you can go online and see their projections and find out what they think is important to get this reversed and then you can contact your political leaders about it. So that’s one thing that you can do personally--express concern to your political leaders about it. But at another level, as we just discussed, making sure personally that you put yourself in a situation where you’re not at risk, which gets to building your savings or having a conversation with yourself about how to prioritize needs vs. wants.
Anastasia: Yeah, we should definitely do a podcast on that soon. Okay, is there anything else that you want to add?
Bill: Yes, this can be a very complex subject and I think we’ve just kind of covered the basics on it, but there are a couple of sources on this that I would recommend and perhaps we can put it on the website.
Anastasia: We can link to it in the episode bio.
Bill: Yeah, there’s an individual by the name of Ray Dalio, and he’s done a 30 minute video at economicprinciples.org that explains economics in a very simple manner to help people understand how a lot of this works. I can tell you that I’ve had both undergraduate and graduate courses in economics and his 30 minute video is as good a synopsis of the whole subject of any that I’ve ever heard. He recently did another TED Talks that’s been placed on YouTube that talks about coronavirus and the effect on our economy and gets to a lot of the points that we discussed here today. So I would encourage any of you that are interested in learning more about it to refer to those sources.
Anastasia: Great, we’ll link to that.
Bill: Other than that, the world is not coming to an end (laughs).
Anastasia: (Laughs) Yet.
Bill: We will get through this (laughs).
Anastasia: We’re going to tell this to ourselves as many times as we need to hear it, probably every day, probably multiple times a day.
Bill: But it’s reached the point where it can’t be ignored any longer.
Anastasia: Which is how America tends to deal with its problem anyway (laughs).
Bill: Yeah, it seems we need to be in crisis mode...
Anastasia: Human nature is put off solving the issue as long as possible Ah, love humanity. So great.
Bill: (Laughs) Yeah.
Anastasia: Okay, well that’s all I had.
Bill: Okay, thank you very much.
Anastasia: Thank you, Dad.
Anastasia: Thank you for listening to Creating Wealth! If you liked our podcast, please subscribe and consider recommending it to your friends or leaving us a review on your podcast app. We would love to discuss your questions. You can email them to us at firstname.lastname@example.org. You can also find full transcripts of every episode on taberasset.com. That’s Taber with an “e” not an “o.” Thank you for joining us on the path to financial abundance. We’ll see you next time!