NWP Monthly Digest | June 2023
Debt Ceiling Nonsense
One of the more ridiculous things that we deal with as a nation is front and center once again. If this is the first that you’re hearing of it, I apologize, but it’s been hard to avoid it if you look at a TV or your phone with any regularity.
It’s the United States of America’s debt ceiling and the horrendous political theatre that accompanies it.
(Also, before I get too far into this, please understand that when I refer to the debt ceiling as “nonsense” and “ridiculous political theatre,” that does not mean that I’m pro-money printing and borrowing future resources in an unlimited capacity. To the contrary, I do believe that the US has major issues with its current debt levels, and I would love to see a more balanced budget. Nonetheless, getting to this point in negotiations can only be described as stupid.)
UNDERSTANDING THE UNITED STATES BUDGET
Let’s discuss the way the U.S. deals with its budget on the simplest level.
Every year, agencies of the Federal Government figure out how much money they need to operate and make requests to the White House’s Office of Management and Budget (OMB). These requests are organized into a massive document, and the President then delivers their proposed budget to Congress. Sounds simple, right?
Until Congress rips this proposed budget to shreds, and negotiation begins in earnest between all major players in the different political parties. Twelve different spending committees take the proposed budget and discuss changes they would like to see. Please make note of this portion of the process. This is where the sausage is made. This is how any family, company, or government goes about creating a plan to run their enterprise. This is when changes should be requested, restraint shown, and trade-offs made.
After the committees finish their work, budget resolutions are made by both the Congress and Senate, and both houses must agree on their final spending package before it is sent back to the President for final approval or veto. We now have a plan for how much money we expect the government to take in and spend for the year. This is where it should end, but…
THE DEBT CEILING
In addition to its annual budgeting process, the U.S. Government also creates a ceiling/cap on the total amount of borrowing that is allowed by law. Very few countries have a law that requires the government’s overall debt amount to be capped, and Denmark is the only other developed nation in the world that has one besides the U.S. Australia, for example, got rid of their debt ceiling in 2013 after having to increase it four times in six years. The U.S. has increased our debt ceiling 22 times in 22 years. Denmark only increased theirs one time, and they didn’t even have to.
Why this is so ridiculous
Hopefully, this simple description helps you understand why I find this process so stupid. It’s like you and your spouse agreeing to buy a house and then deciding not to pay your mortgage six months later because you think you borrowed too much.
If that doesn’t help, here is a more in-depth explanation.
Only Congress holds “the power of the purse” in the U.S., not the President. Under the Constitution, the President cannot change the budget that has already been approved by Congress and the Senate. The 14th Amendment of the Constitution does not allow the U.S. to default on its debt, either, so the government finds itself between a rock and hard place every time we have to have discussions regarding our debt limit. We already agreed to buy the house, now we have to pay the mortgage, right?
We now routinely take this political theatre to the very edge of the debt limit, which everyone knew about when the budget was approved, and now Congress is forcing negotiations with the President to cut discretionary spending or else they will not agree to lift the debt ceiling, forcing default. Again, the President can’t change the budget that has already been agreed upon and can’t allow the country to default on its debt obligations. So what are we even doing here?
This Isn’t about either political party
Since 1929, the United States has only run a budget surplus 13 times. The last budget surplus came under the Clinton administration along side a Republican-led Congress from 1998 to 2000. We have run huge, sometimes astronomical, deficits under every President since 2001, both Democrat and Republican, so nobody can stand on the financial moral high ground in this debate. Our country needs to get its house in order right now, and it needs to happen during the budgeting process, not during a last-minute, circus-like negotiation due to a debt ceiling that has absolutely no effect on our spending problems.
Debt to GDP is most economists’ favorite way to look at debt exposure. GDP is the country’s income (or economic output). As you can imagine, having as much debt as you do income is not ideal. Paying the interest on our debt was estimated to be $305 billion in 2022, and it’s the fastest growing expense of the U.S. Government.
Up until the Great Financial Crisis in 2008 (and after World War II), the U.S. generally kept its borrowing levels to 50% of debt to GDP or less. Today, that number is expected to reach 133% of debt to GDP by the end of 2023. Borrowing money from future generations strangles growth and prosperity, and this is a major concern. We either have to grow our way out of this mess, allow inflation to make our future debt worth less, increase taxes, or become extremely austere in our spending in future years. Growing our way out of the mess is the only option that isn’t painful, and it would take decades for it to show results. More than likely, we will see a combination of all these measures put into place.
As of this writing, the White House and Congress have come to an agreement to lift the debt ceiling until 2025, which will be the 78th time it as been lifted since it was enacted in 1960. Congress has approved the new bill, ironically called the Fiscal Responsibility Act, and Chuck Schumer has promised to fast-track the bill’s approval in the Senate. Treasury Secretary Janet Yellen has been very vocal that the U.S. Treasury will begin running out of money to pay its bills starting next week on June 5th, so not getting this final leg of approval could be devastating to the global economy and the citizens of the United States. Keep in mind, however, that this is all self-inflicted, seemingly has no power to reduce government spending, and is purely for political gamesmanship. Personally, I would rather see this get taken care of during the actual budgeting process. I hope you can see why.
Noble Wealth Pro Tip of the Month
Keeping with the theme of budgeting, let’s talk about cash flow management. Unlike the U.S. Government, American households do not have the ability to create money out of thin air when faced with a cash constraint. Getting your budget in order should be the most important thing you focus on, week after week, month after month, and year after year.
Let’s say your household (a household of two, you and your significant other, in this example) generates $100k of income per year. We’ll use 25% as our effective tax rate figure, which includes federal, state, local, and payroll taxes on your income. You’re left with $75k of take-home pay or $6,250 per month. Here’s a basic outline of how that cash will be consumed using a very loose 50/35/15* approach:
Rent/mortgage = $1,600/month (average monthly rent in the U.S. is approximately $1,700, and the average mortgage payment is about $1,500)
Other bills (cell phone, internet, utilities, insurance) = $500
Transportation (car payment, gas, maintenance) = $500
Food/Drinks (groceries, dining out, bars and drinks) = $1,000
Discretionary spending (travel, shopping, entertainment) = $1,400
Savings (15% savings rate) = $1,250
I’ll tell you right now that there isn’t a single person reading this that won’t lose their mind over one of these categories, if not most of them. Someone would tell me that this household should be spending less on food and saving more or this household shouldn’t own a car or what if they have kids or that’s way too little for rent/mortgage (which I agree with). Everyone’s personal finances are PERSONAL. There is no right or wrong with cash flow management, except the cardinal rule of spend less than you make. You have to get to get this part right, because 95% of people’s personal financial problems can be solved by making more money or spending less of it. If you spend more money than you make like the U.S. Government, you will eventually come crashing into your own debt ceiling with no way to fix it.
*The 50/35/15 budget framework is a slight variation of the popular 50/30/20 approach made famous by Elizabeth Warren where 50% of your take-home pay is spent on needs (half of that on housing or 25% of the total), 30% on wants, and 20% on savings.
Things We’re Listening To
The Morgan Housel Podcast
Morgan Housel is considered by many to be “the greatest financial writer of his generation”. I don’t disagree. Finally, after many of his fans begged him for it, Housel has launched a podcast. It’s easy to digest, has relatively short episodes, and is filled with wisdom. Here are some of my favorites, with a definite nod to the theme of this month’s newsletter:
The Art of Spending Money - March 2nd, 2023
Rules of the Money Game - March 15th, 2023
Everything You Can’t Have - March 30th, 2023
Your Money and Your Family - April 20th, 2023
-Your team at Noble Wealth Partners
“There is nothing noble about being superior to your fellow man. True nobility is being superior to your former self.” - Ernest Hemingway