In the 1980s I was a real estate entrepreneur. I bought apartment buildings in need of attention, gave it to them and in a few years sold the buildings at a profit. In 1982 I purchased my biggest ever building, a 90-unit apartment building in West Philadelphia. It was in need of a great deal of repair, but it was also mostly occupied by rent-paying tenants.
The building was originally built in 1928 and it turned out that there were decades of deferred maintenance. In my first year alone, I had to replace the massive hot water heaters, the heating plant, the roof and the hallway carpet. The next year there was a massive sewer line break inside the building and along with other issues my cash reserves were exhausted. I told my bank that it was possible that I might have to miss a mortgage payment or two. They responded that there was no need to do that because they could lend me more money to meet these repairs.
I agreed and the strategy worked for everyone. I made the repairs, put the building up for sale, sold it, paid off both the mortgage and additional loan and took home a very nice profit.
When you lend money to someone you are in the position of wishing them great success, at least until your loan comes due.
Because of that, the easiest decision for a bank to make is to lend money to someone they have already lent money to. The reason is simple. No one wants to lose their principle when it’s possible that with only a little more cash your borrower can get through to the other side and pay you back, as I was able to with my apartment building.
From a lender’s perspective, the additional loan is a defensive strategy. They are defending their original loan.
But the strategy has limitations. No matter how good your credit history is, everyone has a credit ceiling above which lenders will be very wary to lend.
The United States Government has never missed a payment. Never. Not even in the Civil War. That’s one of the very best records of any borrower ever. And because of it and because of the amazing, continued prosperity and growth of the American economy, our ceiling continues to move higher. No one actually knows what the US government’s debt ceiling is. This should not be confused with the artificial debt limit the government imposes on itself, which has become an irregular and all too often game of political chicken with the long history of timely debt payments used as a political bargaining chip. Few things would be better than to get rid of that game by repealing an old and obsolete statute that requires congress to approve increases in the government’s borrowing capacity.
No, I’m talking about the ceiling above which our lenders will no longer lend to us. Not only does no one know what that ceiling is, whatever it is, it’s always moving because the US economy continues, on average, to increase in size.
But we are now beginning to see the negative effects of all this debt. Recently the amount of money the US Treasury is required to pay out in interest each year has reached $900 billion. Much of this is due to higher interest rates. It’s estimated that by 2025, if interest rates fall as expected, then our debt service payments could fall to as low as $600 billion. Whew! What a relief! Um, not.
At the current rate of $900 billion, debt payments are the largest expense of the US government. Larger even than our military budget.
And even if it shrinks down to $600 billion the fact remains that this cost is choking the government’s ability to do things.
At present, this is not really a crisis or anything close to it. That’s because our government continues to do all the things we expect it to do. The bill just gets added to the huge national debt pile.
And we have started to see implications of the debt problem in America’s aging infrastructure. Have you taken a train lately? Americans do not embrace trains with the enthusiasm of Europe or much of developed Asia so it may not be surprising that almost all our main downtown train stations were built in the 1930s.
We prefer driving our cars and airplane travel. But the last big airport built in the US was the Denver Airport in 1995, almost 30 years ago.
The Biden Administration has implemented some big programs to upgrade our infrastructure and that’s great. But when $900 billon is already going out the door in interest payments, our ability to upgrade infrastructure, improve our military, upgrade education, build new hospitals, and on and on and on is impaired.
America’s aging infrastructure is at least partially a consequence of our high levels of national debt.
What we really have is a slowly building problem. It may never become a crisis. But as debt continues to pile up and debt payments continue to soar, our future increasingly is going to feature less and less public spending. Government’s ability to do things will be increasingly limited.
Will Rogers pointed out that America is a country where there are 10 men who can buy the world, but half of the population can barely get by, if at all.
In all the decades since he said that it really hasn’t changed. We remain the wealthiest country in the world in which Elon Musk or Jeffrey Bezos might become the world’s first trillionaire, but half of Americans work in low wage service jobs, or not at all.
By deeply indebting the country we have moved from a nation in which we did things together to one in which billionaires do things. In 1969 a government agency, NASA, using our tax dollars, sent a man to the moon. We did that together. But today, easily 90% of the rockets launched into space from the US are by a private company, SpaceX. SpaceX does amazing things that the government couldn’t or wouldn’t do. But it’s no longer us. It’s just Elon.
In 1969 the top tax rate was 70%. Now it’s 37%. Lowering the tax rate both greatly contributed to the deep indebtedness of the United States and allowed fortunes to grow at a faster rate. Nothing demonstrates the effect of this more than the space program. We the people are too much in debt to do it. Now it’s the private fortunes of Elon Musk and Jeff Bezos.
And what does that tell you? Maybe your future income has been borrowed against in order to make it easier for the rich to get richer. Please don’t get me wrong. I have previously written about the wonders of capitalism, and I am unshaken in my belief that it is the greatest economic system ever invented. And I am not saying that Musk, Bezos, et al don’t deserve to be super wealthy. But I am saying that something changed dramatically in our society when we chose to lower the top tax rates. Wealth has been transferred upwards and now instead of we the people conquering space, a private corporation is doing it. To be sure there are good things about that. I have watched many of SpaceX’s launches and they do things that I previously didn’t imagine could happen in my lifetime, and they do it for a fraction of the cost of a NASA launch. It’s absolutely amazing and I marvel at every launch. But I also find it a little sad that it’s no longer we the people doing it.
Hal Masover is a Chartered Retirement Planning Counselor and a registered representative. His firm, Investment Insights, LLC is at 508 N 2nd Street, Suite 203, Fairfield, IA 52556. Securities offered through, Cambridge Investment Research, Inc, a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Investment Insights, Inc & Cambridge are not affiliated. Comments and questions can be sent to hal.masover@emailsri.com These are the opinions of Hal Masover and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. Investing involves risk. Depending on the types of investments, there may be varying degrees of risk. Investors should be prepared to bear loss, including total loss of principal. Past performance is no guarantee of future results.