We are getting close to hitting another unfortunate milestone. I checked the debt clock this morning and we are less than 200 billion away from surpassing $17 trillion. It was only October right before the elections of last year that we surpassed $16 trillion.
So, when does this become a problem? After all, the politicians sure don't seem to be concerned with it.
Watch the Government Bond Market
Well, there are a couple of issues to consider. First, we watch the government bond market. Bonds that are sold by our government represent debt. Individuals buy our bonds (they loan us money) and we guarantee that we will pay it back. Believe it or not, our bonds/debt is still attractive to those around the world.
However, at some point, this will not be the case and investors will demand higher interest rates as motivation to continue buying our bonds. If we run into trouble selling government bonds, we have a real problem on our hands. Interest rates represent the cost of holding debt. In order to continue to pull off this Ponzi scheme, it is imperative to keep interest rates low. Spiking interest rates was the issue that kicked off the financial crisis in Europe.
Engulfed in Entitlement Programs
There is something else that we have to watch. The government, over the years, has greatly increased the span of entitlement programs creating a much larger percentage of the public dependent on the government for their needs.
Food stamps, or The Supplemental Nutrition Assistance Program, as it's now known. Nearly 30 million more Americans receive them than in the year 2000. (Leave it up to the government to change the name of food stamps to something else because food stamps doesn't sound politically correct.)
Social Security Disability: 3 million Americans received payments in 1990 -- today it's 8.6 million.
Pell grants: 3.9 million students were awarded them in 2000. Today it's 9.7 million, even though nearly half of graduates work in jobs that require no degree.
And extended unemployment benefits: 26 weeks had been the standard -- today it's 52 weeks or more for many.
The socialization of America just feeds the problem. These entitlement programs require tremendous amounts of money each year...money that the government doesn't have. These government programs continue to grow. At some point this starts to overwhelm the system because the need is so great. The poverty rate in America is now 14%.
So, when does this become a problem?
Typically when a country gets into crisis there is another country or set of countries that steps in and acts as the "lender of last resort." While Greece has unsolvable financial problems, they continue to get bailed out by entities and countries in Europe. Sad as it is, we are headed down the same path as countries like Greece. The problem is that when we get to the crisis phase, who is going to bail us out? Everyone points to the problem in the future. This debt problem is a problem for future generations.
Maybe it is already the problem that our generation is going to face. After all, debt is not a problem until it is a problem and then it is an overnight nightmare. A debt crisis doesn't give advance notice; it sneaks up on you.