Get Debt Back Under Control
In podcast episode #461, Tom discusses how to get debt back under control. By comparing what the Government was able to accomplish after World War II, Tom covers getting debt back to a more realistic, manageable level – not necessarily by cutting spending – but by increasing revenue.
On a personal level, Tom compares what steps can be taken to control debt and keep debt at “more comfortable” levels, if you are in a situation with high levels of debt.
Tom referenced an article written recently in Bloomberg’s Opinion section, titled “How America Can Get Its Debt back under Control,” written by Karl Smith.
In this podcast episode, Tom also referenced a recent video we put together on the US Government Budget Mess, here.
You can find links to all our other podcast episodes carried here at Mullooly Asset Management right here.
Transcript for “Get Debt Back Under Control”
There’s an old saying that goes how do you eat an elephant?
And the answer is: one bite at a time.
Same thing when we’re trying to tackle debt.
Today we’re going to talk about the situation that the United States is in with $33 trillion of debt – and tie it back to personal situations, anecdotes that we’ve seen here at Mullooly Asset Management, where we’ve tried to help individuals get in better control of their financial situation and their debt.
And so this won’t be a political statement. I know – every time we talk about the US debt and the deficit, people come out of the woodwork and start giving their opinions about “the Republicans did this, the Democrats did that.” This is not going to be a political statement.
We’re going to talk some economics instead. But really one of the things that I like to talk about, when we’re discussing economics, is it is easy to get stuck in the weeds and bog down with jargon in terms that, quite frankly, lose people in the course of a conversation.
We want to talk about debt in meaningful ways that can help individuals get a better grasp on how to tackle this.
So many times we see folks that want to put a quick fix, a bandaid, over a problem. I can tell you from experience that those problems don’t get resolved very quickly.
It’s kind of like losing weight. You didn’t gain all that weight overnight.
You’re not going to lose it overnight too.
Again, not a political statement, but an economic discussion for podcast episode 461.
Episode 461, how do you tackle debt? Same way you eat an elephant, one bite at a time.
I made a video recently about the national debt and the budget. We’ll link to this in the show notes.
When you break down the national budget into dollars and cents, one of the Congressman explained it very clearly, so I’m going to use his example again.
When you look at the budget in terms of a dollar, 67 cents of the dollar goes towards social programs.
67 cents on the dollar is going towards social security, medicare, medicaid – programs like that.
Really, that’s un-cuttable.
14 cents out of every dollar in the current budget is going towards defense.
Again, something that’s not very cuttable.
About 10% or 10 cents on the dollar in the budget goes toward interest on debt. That’s a reality.
We have to pay interest on our money that we borrow.
So that leaves about nine cents on every dollar in the budget – nine cents that you can dedicate towards spending.
And that nine cents, or 9% of the budget — this is what everyone is trying to zoom in on and force cuts to try and make the budget come under some arbitrary spending cap they have in place.
It’s nonsense.
But the problem is, where else can you cut?
Sometimes you get to a point in your economic situation, your own personal economic situation, where there are things you just can’t cut.
You can’t pay less on your mortgage.
You can’t pay less on a car loan.
You can’t pay less on certain things.
And it’s a little backward. It’s very hard to cut in some of these places.
And when we’re sitting down with individuals, trying to help them get their finances in order, we do a lot of the same things, the same type of examinations – on a personal level.
We want to see where your dollars get spent.
Where can we trim?
Where can we increase things, decrease things – to make it all fit a little better.
But we also talk about things like “how do we grow the top line?” “How do we increase the revenue?”
This is something that is never discussed in Washington.
Why aren’t they focusing on growing the revenue, growing the top line, increasing the size of the pie?
If you increase the revenues or, for national level, the gross domestic product (that’s GDP), that is the national output, that’s what we make, that’s what we do.
If we could do something about that, a lot of these deficit problems may go away.
There was an article that I’ll reference and I’ll link to it in the show notes – a Bloomberg opinion piece recently written by Karl Smith, titled “How America Can Get Its Debt Back Under Control.” Very interesting article. You should take some time to read it.
Unfortunately, Bloomberg is a paywall site. You could probably sign up and get at least one or two free articles. I encourage you to do this.
This is an article published November 15th, so just a couple of days ago. The subheading was “The US should be able to put its fiscal house in order without draconian tax hikes and painful spending cuts. The postwar years, offer a roadmap.”
He’s not wrong. So who is Karl Smith? Well, he’s a columnist for Bloomberg opinion. He was the vice president for federal policy at the Tax Foundation. Smith was also an assistant professor of economics at the University of North Carolina.
One of the points he made was if you want a quick fix and eliminate the deficit (we’re going to talk about the deficit), but I also want to point out that we’ve got the deficit. That’s a budget deficit, so we bring in X but we’re spending Y.
The difference is — that spread — is the deficit that gets added to the national debt. The national debt at this moment is $33 trillion.
So they’ve got a $33 trillion debt bomb and they’re paying interest on all of the debt.
It’s one thing to carry debt from a long time ago, but you’re never going to get out of debt – if you are running a deficit every year.
I want you to think about that on a personal level.
You’re not going to get out of debt if you spend more than you bring in. That’s really the basis of understanding budgeting and economics.
Just going back to the Bloomberg article, if you wanted to apply a short-term fix for a long-term problem, it’s a spending problem.
If you wanted to eliminate the deficit that’s just the difference in this year’s national budget.
To immediately balance the budget, you need to have, across the board, a 29% spending cut. That also includes not renewing the 2017 Tax Cut and Jobs Act, the 2017 TCJA. The nickname for that is the Trump tax cuts. They’re going to expire without some kind of resolution. If they are not acted on, they’re going to expire at the end of 2025.
The fiscal budget for 2025 will be written in a year from now, in October of 2024.
Just to balance the budget for one single year, you’d need to have 29% across the board spending cuts. When we say across the board, we’re not kidding. To balance the budget for one year – a short-term fix for a long-term problem – you would have a 29% spending cut in Social Security. That wouldn’t go over very well.
You’d have a 29% spending cut in Social Security.
A 29% cut in the spending on defense. Again, that wouldn’t go over very well.
You’d also have a 29% cut in the interest that you’re paying on debt.
That would absolutely not go over very well.
The problem with a 29% spending cut is that it would put the economy – the US economy, and very likely the global economy – into the biggest tailspin you’ve ever seen. Period. I mean greater than the Great Depression.
The problem with going into a tailspin of that kind of size is you would actually need MORE government spending to get us out of the hole that we’re creating.
So, yeah, we’d have a balanced budget. This is what Congress and the White House started to finally understand in the late 1930s… is that, to have a balanced budget, you’re going to slow down the economy. And again — trying to have a short-term fix for a longer term, or lifestyle problem.
We see this a lot when people come into the office they say, “hey, I want to finally get to a point where I don’t have any more debt. I want to pay off car loan, I want to pay off credit cards, I want to pay off student loans. Or the flip side, I want to pay off my mortgage. I want to take from the assets I have and pay off the debts.”
We understand there’s a “psychological benefit” that comes from eliminating debt. But it may come at a very heavy cost. A cost you may not see on Tuesday afternoon when you call your advisor and say, “hey, I want to do this.”
Is this debt situation that the United States is in – is this a crisis? Because people are always calling this a debt crisis. I mean, I’ve been in the investment business now for almost 40 years and every year I’ve heard about the debt crisis. The numbers just get larger and larger and larger.
Let’s put this in some perspective. When we say $33 trillion, it’s hard to even imagine in your mind what one trillion dollars looks like.
Now multiply that times 33.
So to us sometimes, when we have personal debts, it FEELS like $33 trillion.
It seems like an unsurmountable problem – because we have a limited capacity to eliminate all that debt in a very short period of time. But there’s a difference when we’re talking about the national debt.
See, one of the things people forget, they get hung up on that number “$33 trillion.” But the United States can print its own currency.
They just create more money when they need it – for spending.
And so every time they print – I want people to understand (listeners), to understand – every time the US government prints money, they create more currency… they are inflating the number of dollars in circulation. They are pumping more dollars into the economy, more dollars in circulation.
That makes the dollars that are folded up and sitting in your wallet, or in your pocket, not go as far as they used to. Because there’s so much more out there. Understand that the US can print their own currency.
As a side note, I’ll also mention while the federal government can print their own dollars… but when we talk about the state situation — what’s happening in states like New Jersey — what’s happening in states like Illinois and California?
They are running budget deficits almost every year. That should never happen.
Unfortunately, states like Illinois have dug themselves into such a gigantic hole, they can’t get out of. The biggest difference is that if a state runs a budget deficit and now has debt, they can’t print their own money.
So there’s only a couple of ways that states can fix that debt problem.
One is they’ve got to increase revenues – taxes. That’s really the only way that they can do it.
The other way would be to cut spending. And states have so many fixed obligations it’s really hard to find where you can cut.
So states have been mismanaged into these situations. I don’t know how they’re going to get out. They may wind up needing some type of government assistance to dig their way out of these holes. They can’t print money.
We can’t print money. We have to figure out a way to increase our revenue – or decrease our spending – to fix it.
What about earning our way out of a problem? If your expenses are too high and you don’t want to cut — or you can’t find a place to cut — You’ve got to figure out a way to grow the top line, to increase your revenues, to increase the size of the pie.
We have a very good example – from a national level – how that situation can work to your benefit. Right here in the United States, in the years following World War II, give us a pretty interesting roadmap. As Karl Smith, who wrote the Bloomberg article, discusses, after World War II, the ratio of debt to GDP.
This is a number a lot of economists look at how much debt are we carrying, compared to our national output?
Then, like now, the ratio of debt to GDP was around, and is around, 120%.
Let me put this in dollar terms. Our GDP today is roughly $27 trillion. Our national output is around $27 trillion a year. Our total debt is $33 trillion. When you do the math, the debt to GDP ratio is 120%.
But by 1951, just six years after the end of World War II, that ratio had fallen from 120% to 73%.
Very interesting. Because in the years after World War II the nation was concerned about “we have shortages of inventory.” “We don’t have any surpluses.”
What we did have a surplus was thousands, hundreds of thousands of soldiers coming back, looking for work.
It became an interesting situation – where everybody thought we were going to have some hard economic times. It turned out to be just the opposite.
Problem is, a lot of people want to have a “short-term fix for a long-term problem.” It doesn’t work that way.
A couple of interesting things to note with this period. After World War II, the “shrink” in the debt-to-GDP ratio did not happen through spending cuts!
In fact, it was just the opposite. It wasn’t spending cuts at all. They increased spending. The “shrink” that we saw in debt-to-GDP ratio came through stronger economic growth. Here we are again talking about “growing the pie.”
From 1947 – get this – from 1947 after the war ended, through 1957. So a period of almost 11 years, the United States averaged an annual growth rate of 4.1%.
4.1% growth was enough to change the debt ratio from 120% down to 73%.
That’s very interesting because about a week ago, we got the preliminary read for the third quarter GDP. That number came in at 4.9%. While there’s a lot of people belly-aching about how bad things are – and how bad the economy is, we just finished the third quarter in 2023, where we had economic growth of almost 5%.
Smith writes in the Bloomberg article he believes the economy is in a better place today than it was 80 years ago after World War II. I tend to agree.
Smith did some math and estimates if the economy were to grow at 4.25% over the next 10 years, not an unrealistic assumption.
If the economy were to grow at 4.25% over the next 10 years, it gets our debt-to-GDP ratio from 120% down to 97%
A huge, huge improvement.
Today we’ve gotten conditioned to the idea that the economy grows at 2% a year. That’s been the case for much of the last 20 years.
So when you see 4% or 4.1% or 4.25%, people are naturally going to say “yeah, but with that kind of growth you’re going to have inflation.”
A couple of things need to work in your favor.
First, if interest rates are “not zero.” Interest rates are going to help keep the level of inflation down.
Next, the thing you need to avoid is when you start bringing in more money… if your household income were to grow at 4.25% for the next 10 years .. you’re going to experience a certain amount of lifestyle creep.
This is the problem.
We’ve seen it at the national level, in Congress.
We see it on a personal level – when folks come in to talk to us about debt management – it’s this lifestyle creep.
It’s like, “hey, I’ve been working hard, my income is finally starting to go up. I can do some things. We can take a vacation that we haven’t taken. I can buy a new car. I can do things that I want to do to keep up with the Joneses.”
It’s very hard to do – but you need to avoid that lifestyle creep.
In Congress they just start tacking on additional spending.
This can be done. There have been times in the past, in recent history, where we have had a balanced budget. 1969 budget put forward by Lyndon Johnson, we had a balanced budget Also the last three or four years of the Bill Clinton administration.
If you remember, he famously said “it’s the economy stupid.” You need to focus on not having runaway spending, keeping things under control.
But a point that I’ll remind folks is “every budget is a hostage to the economy.”
In the situation that we had in the late 1990s, going into 2000, you need to know history. We had a recession in 1990 and 1991. It wasn’t a severe recession, but enough to really slow the economy down.
When the economy started to recover at the end of 91 and beginning of 92, we went from that point forward – six years without any slowdown in the economy. We had a situation where we had good growth. We had a nice tailwind. We had six years of solid growth – not runaway high growth – really kind of boring, unspectacular growth between 1992 and 1998.
We also had inflation that stayed under 3% per year.
We had a very good period where we were able to balance the budget. We actually had two years where we applied some of the surplus in the budget to knock down debt.
I mean right now, when you look back, 25 years later, and look at how much we paid down some of the debt, it’s a rounding error.
Today, the President and Congress are not going to be able to balance a budget if the economy were to slow down, or if the economy were to recede, go into a recession – or if we have a situation where output in general just declines.
You also can’t balance a budget if unemployment rises, more and more people out of work. There’s no way you’re going to have a balanced budget – because you’re just going to have more costs.
When you have situations where the economy is chugging along, you’re getting good growth. Your inflation is under control. We saw just like we did in the 1990’s – corporate profits rose, personal incomes rose. We saw fewer people going on welfare, a smaller amount of government spending.
The takeaway from this is that fixing a debt problem is NEVER a quick fix.
We have folks that call us and say, “hey, I want to get rid of this car loan, or I want to knock off this home equity line of credit, or I want to finally pay off my mortgage, or I’ve got student loans.”
Whatever it is, what they want to do is take money out of their assets, the asset column on their balance sheet, and use it to pay off liabilities that they have.
There’s a certain “psychological benefit” that comes with saying “I don’t have that debt” AND you’re also eliminating a monthly expense. All good.
The problem is that most times, this transfer of assets to offset liabilities is not “thought all the way through.”
When you look at a personal budgeting situation, you want to dig your way out of a debt hole that you have. The best advice we can give people is when you’re in a hole, stop digging.
You can never tackle your debt problem if you’re spending more than you’re making year after year. Because that only adds to the debt. The first thing we want to do is stop digging that hole.
We want to figure out how we’re going to reduce the expenses that you have and/or grow the top line to increase your revenues.
We’ve seen situations where folks have successfully eliminated debt. But it takes several years and it takes a PLAN to do this.
Knocking out all your debts in one year is a little unrealistic – unless it’s a small debt that needs to just be tackled once and for all.
For most people, if you’ve got large debts that you need to move on from, you need to come up with a plan that will: number 1, ensure that you maintain at least some minimum lifestyle that you’re used to; and 2, any excess dollars are going to eliminate that debt.
It’s a very hard conversation to have. You have to be very realistic about where the spending goes – or what you can do to increase your income. But it needs to be done.
Understand, just like I had mentioned before with dieting, you didn’t put all the weight on overnight. You’re not going to eliminate the debt overnight. The best way to tackle this is over 24, 36, 48 months. As I began this episode talking about “how do you eat an elephant – one bite at a time.”
A lot of times when we say to folks, “hey, we’re going to put together a plan for you to help you get out of debt.” When we say, when we start throwing around terms like “this is going to take five years,” people’s eyes glaze over. They just stop listening.
But if we tell them, “hey, here’s a plan where we can do this in 48 bites of this problem that we have.” That’s four years.
“We can do this in 60 bites.” 60 months becomes a lot more manageable.
And that really is the message for episode 461. If you know someone who’s in what seems like an impossible debt situation, we would be happy to talk to them and see if we can point them in the right direction.
Thanks again for listening.
Speaker 2: 25:33
Tom Mullooly is an investment advisor representative with Mullooly Asset Management. All opinions expressed by Tom and his podcast guests are solely their own opinions and do not necessarily reflect the opinions of Mullooly Asset Management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of Mullooly Asset Management may maintain positions and securities discussed in this podcast.
