Fintech executive, writer, math geek, and investment systems developer. Founder and CEO of Altruist and Founder of FormulaFolios.

Will the USA Go Broke?  The United States Budget Dilemma

Will the USA Go Broke? The United States Budget Dilemma

Generally my posts are based on my own research and focus financial market/product/general education.  Today I have a rather unique post based on a video created by Hal Mason.  This particular video has been a huge hit on YouTube with over 3,300,000 views!  I've actually had a couple clients send me links to the video so I thought I'd share it too, as well as address why so many people are watching it. Here's the general premise:

  • The Unites States is in a fiscal mess

  • We're spending far more than we take in

  • And ultimately, there's almost no way to fix the problem (without a lot of pain)

I'll address these issues in a moment, but first spend 5 1/2 minutes to watch Hal's video.

Now that you've seen the video, and hopefully not lost your lunch ;), let's dig into some of what he shares.  I'll also provide some general thoughts on how this impacts investors, and what they should do about it.

Item 1 - The United States Budget

The first thing Mr. Mason shows is the US Budget for 2012.  You can find the actual document by going to to this site:

I found the same document he used in his video and marked it up similarly so it looks pretty much the same.  If you click on the image it will expand into full size.

2012 US Gov Budget

2012 US Gov Budget

It goes without saying, this isn't pretty.  In 2012 we're budgeted to collect $2.5 trillion and spend $3.8 trillion.

What Mr. Mason then points out is perhaps the scariest part of the problem:

Our budget for just Mandatory Programs (Social Security, Medicare, Medicaid, etc) and interest on our debt - is actually MORE than what we collect in total receipts (taxes).


Another crazy part of this is that the interest we pay on our debts is actually really low because interest rates are at historic lows.

Here's the image that shows this:

Budget Mess 2

Budget Mess 2

As you can see, just the Mandatory Programs and Debt Interest amount to roughly $2.5 trillion.  You can also see that the Discretionary Programs (military, general Government operating budget) are just over $1.3 trillion.

Item 2 - There's No Way to Fix the Problems Without Significant Pain

Mr. Mason points out that even if we completely eliminated Government, we're still over budget.  And realistically, we aren't going to completely eliminate the Government.

On the flip side, it's hard to imagine what would happen if we significantly cut Mandatory Programs like Social Security, Medicare, Medicaid, Unemployment Benefits, etc.  Mr. Mason suggests there would be mass civil unrest, riots much like what have happened in Greece.

If we can't cut spending to get our budget on track, then the only other solution is to raise taxes.  To make that happen we'd have to raise taxes 50%.  Ouch!

That too is hard to imagine.  After all, if taxes went up 50% how many people would still be able to meet their individual budgets?  Would there be a mass of bankruptcies, foreclosures, businesses shut down?  That is not addressed in the video, nor does anyone know exactly what would happen.  However, with history as our guide, we should know full well that massive tax increases have never worked.  It cripples the economy and actually causes more harm than gain.

Item 3 - What You Should do About This Problem

Unfortunately this is where Mr. Mason doesn't give real clear instructions.  He encourages us to all reach out to our politicians and demand they start working on fixing the problem.  He also provides this simple 3 step plan:

  1. Washington must admit there's a problem

  2. Washington must explain the problem to everyone

  3. We must face the pain of fixing the problem

Piece of cake, right?

The reality is eventually this fiscal disaster will have to be dealt with.  According to our own Governments forecasts they expect our National Debt to reach $20 trillion by 2022.  There is no plan in place to not operate at a deficit between now and then.

Sadly, our Government is also forecasting our Gross Domestic Product (GDP or total economy) to grow from $14.5 trillion to $25.5 trillion.  That's sad because there's almost no possible way for our economy to actually grow that large in the next 10 years.  Their forecast would equal GDP growth of 5.8% annually for the next 10 years.  Frankly, that's laughable.  Currently GDP has been closer to 2-3% per year.

What this all means is that the National Debt could very well be much, much higher than our Government is forecasting.  That would mean the day of reckoning for all this poor financial management could actually be much sooner than many think.

Item 4 - Jason's Plan for Blog Readers

I think Mr. Mason did a great job with his video.  In just a few minutes he explains using facts that we have a real problem, and does so in such a way anyone can understand it.  I also agree that as citizens of this great country, we should do all we can to hold our elected leaders responsible to acknowledging and fixing the problems we face.

We also, though,  need to have a plan that protects our families and our standard of living.

For this, I have a simple set of instructions that will hopefully help the many readers of this blog:

  1. Don't be greedy. Be conservative instead. Too many people see others taking large risks and making big returns - then join the party too late. This almost always results in investment losses that are hard to recover from. If the US sinks into a truly bad recession as a result of our budget woes, it will have paid off tremendously to be conservative and not chase high risk investments.

  2. Don't invest in long duration bonds or too many Government bonds. If we've learned anything from Greece's financial woes, it's that owning bonds guaranteed by your government don't mean a whole lot when you're government is broke. Greek bond holders lost 70% of their principal. Don't let that happen to you. Also, don't by a bunch of 30 year bonds. When interest rates rise (and they will eventually) long term bonds will temporarily lose market value. This could be painful, so it's best to be content with the lower rates on shorter duration bonds today so you don't have to feel much pain and could actually benefit from rising rates in the future.

  3. Don't put all your eggs in any one basket, no matter how nice that basket looks. A lot of my blog readers have enjoyed my annuity reviews over the past year. Hopefully I've helped a lot of people from misusing annuities in their financial plan. In times like these, many sales agents try to use data like what's in the Mason video to scare investors. Ultimately they suggest some magical product that keeps the investors money safe. If you feel that urge, just try to remember never to commit too much money to any single investment, even if it is supposedly guaranteed. If we have a large scale recession more severe than the last few we've went through - you'll want to know you're money is well spread out. Anything can happen.

  4. Keep your money flexible and investments able to adapt to rapidly changing conditions. On this blog I share for free a Tactical Asset Allocation model. Tactical Asset Allocation is simply the science of making subtle changes to a portfolio so it can adapt to the environment around it. The USA has gone through a lot, but never a fiscal meltdown. So I'd be very careful following advice that suggests just because some traditional method of investing has worked for 80 years - it will continue to do so for all of eternity. Rather, by being conservative but flexible, I believe you stand the best chance of doing well even in trying times.

So there you have it.  4 simple thoughts on how to be better prepared for what may happen if we don't fix our budget messes.  Hopefully a solid plan gets put into place by our elected leaders, but if not, make sure you know what could happen and what you can do to take care of yourself and your family.

There's a lot more I could write about on this topic.  But we'll save some of that for another day.

Sorry for being a Debby Downer.  As of this writing the market is actually close to its high for the year, and while far from perfect, a lot of economic data has been slowly improving.  It's just not all roses out there.  There will be times like this year where getting decent investment returns is pretty easy - and sometimes that leads to complacency.

This post is really about ensuring we don't get complacent.  Instead we should do the best we can in the current conditions, but always be watching for when the other shoe drops.


Jason Wenk

Is a Bear Market Starting?

Market Update - October 17, 2012