Gundlach Understates The Federal Debt Problem – ValueWalk Premium
Federal Debt Problem

Gundlach Understates The Federal Debt Problem

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When Jeffrey Gundlach says that the federal deficit is on a suicide missing he is understating the problem.

The 2018 “official” U.S. debt of $34 trillion is 120% of GDP and projected to double as a percentage of GDP within the next 20 years. If we add off-the-balance sheet net obligations like Social Security and Medicare, our all-in debt, or so called “fiscal gap,” rises to $110 trillion, or 390% of GDP. Raising taxes and reducing benefits won’t restore solvency.

Something is going to break, and it won’t be pretty.

We’re broke and no one seems to care. We’re all aware that this country owes a lot of money, but no one cares because we’re leading pretty good lives. We have yet to feel the consequences of being broke, but that won’t last long. Some things are already breaking, and an ultimate breakdown is on the way.

This will be the first year when tax receipts won’t pay for Social Security and Medicare benefits. We are spending down the corpus, and will have spent all of the Social Security Trust by 2034, while Medicare monies will only last until 2026. Nothing is being done to head off these catastrophes. Furthermore, some large pension funds are broke, and are likely to renege on their promised benefits.

In the following I share some details on this bankruptcy, and offer some actions that might help, although they are unlikely.

The national debt

As shown in the following graph, the reported national debt of $34 trillion is currently 120% of GDP, a level only seen before in the wake of World War II. But unlike the last time, there are no signs that debt has peaked. I use a percentage of GDP to convey our ability to pay. If every dollar of output our country generates this year were used to pay our debt it would not be enough. Of course we’re not obligated to pay right away and therein lies our ho-hum attitude; we trust some miracle will solve the problem someday.

Federal Debt Problem

But that’s not the whole story. We’ve made promises to older people that can’t be kept unless the promises are changed (broken) and we burden today’s young people with much higher taxes. As shown in the last row of the following table, the present value of the promise to pay Social Security benefits is $29 trillion more than projected receipts, and adding Medicare’s $47 trillion promise brings our off-the-balance sheet liability to $76 trillion, more than twice the commonly published liability. Our all-in national debt is 390% of GDP.

What you should know about Social Security and Medicare

Federal Debt Problem

Source: Compiled by PPCA Inc from various sources

Read the full article by Ron Surz, Advisor Perspectives


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