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posted on 12 May 2017

Debt Is The Problem

Written by , Clarity Financial

But of course, here is the bigger point.

The chart below is the current amount of debt (not including the $1.1 Trillion continuing resolution last week) and the amount of interest currently being paid on that debt.

As the Committee For A Responsible Budget penned on Friday:

“Setting aside the health policy implications of these changes, the fiscal implications could be significant. If more people purchase health insurance, more will be eligible for the AHCA’s tax credits. Assuming no change in employer coverage, we estimate an increase of one million enrollees would cost about $30 billion over a decade, two million would cost $60 billion, five million would cost $150 billion, and ten million would cost $300 billion."

“Taken together, that means the amendments would save an additional $5 billion if one million more people enrolled in insurance each year than CBO’s prior projection. But it would cost $25 billion if two million more people enrolled, $115 billion if five million more enrolled, and $265 billion if ten million did. With 6.5 million or more additional enrollees, the entire legislation would likely increase rather than reduce deficits."

The significant importance of this was pointed out just recently in “Tax Cuts The Economic Growth Cure-All?"

“Of course, as noted, rising debt levels is the real impediment to longer-term increases in economic growth. When 75% of your current Federal Budget goes to entitlements and debt service, there is little left over for the expansion of the economic growth."

“The tailwinds enjoyed by Reagan are now headwinds for Trump."

The true burden on taxpayers is government spending, because the debt requires future interest payments out of future taxes. As debt levels, and subsequently deficits, increase, economic growth is burdened by the diversion of revenue from productive investments into debt service.

This is the same problem that many households in America face today. Many families are struggling to meet the service requirements of the debt they have accumulated over the last couple of decades with the income that is available to them. They can only increase that income marginally by taking on second jobs. However, the biggest ability to service the debt at home is to reduce spending in other areas.

While lowering corporate tax rates will certainly help businesses potentially increase their bottom line earnings, there is a high probability that it will not “trickle down" to middle-class America.

wealth-distribution10-15

While I am certainly hopeful for meaningful changes in tax reform, deregulation and a move back towards a middle-right political agenda, from an investment standpoint there are many economic challenges that are not policy driven.

  • Demographics

  • Structural employment shifts

  • Technological innovations

  • Globalization

  • Financialization

  • Global debt

These challenges will continue to weigh on economic growth, wages and standards of living into the foreseeable future. As a result, incremental tax and policy changes will have a more muted effect on the economy as well.

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