Debtors Prison Blues

Debtors’ prison, once a common institution across Europe and the United States up until the mid-19th Century, were facilities where individuals were incarcerated for being unable to repay their debts. Subjecting debtors to servitude or execution, these were places where a man could reflect on his choices and the consequences of his actions, much like the man Johnny Cash sings about in Folsom Prison Blues. While debt was obviously frowned upon back in those days, it seems positively draconian and antiquated today.

The current administration along with the head of the Department of Government Efficiency (DOGE), are looking to slash government spending and excess. Without intending to debate or comment on if/how effective they will be with these efforts, I would suggest any meaningful reductions in spending/deficits will need to address the largest areas or spending, namely Social Security, Medicare and interest on national debt. The US is now encumbered with expensive spending programs designed for a society with higher fertility rates and a lower life expectancy. Now we live too long and are not having enough children, causing a funding mismatch.

After 20 years of continuous borrowing, with deficits over 10% of the economy for three years, U.S. national debt is now higher as a percentage of GDP than any time since WWII. Despite reaching $36 trillion, policymakers have not contained the debt, and recent laws have increased it. Some argue that debt doesn’t matter and the U.S. should borrow more, but this is concerning.

What drives of our national debt? For one, as debt increases, so does the interest cost. Over the last couple of years rates have moved higher; currently our average interest rate on the debt is 3.32%. Interest costs are the fastest growing “program” in the federal budget. Experts say it could total roughly $13 trillion in the next ten years. Second, we have an aging population; people 65 or older will increase much faster than our working age population. That increase will strain Medicare and Social Security…drivers of future debt.

National debt and national deficits are related, but not the same. The deficit is where we borrow money by selling treasury securities (government bonds). The culmination of that borrowing along with the interest is the national debt. Illustrated in the chart titled “U.S. Deficit Compared to Revenue and Spending, FY 2024.” We took in $4.92 trillion in 2024, but we spent $6.75 trillion, causing a deficit of $1.83 trillion. How do you fill that deficit? By borrowing (selling bonds).

Borrowing has its place, as deficit spending helped avert economic disaster during the COVID-19 pandemic. However, this borrowing still had consequences. High debt also threatens economic viability, strains budgets, makes responding to the next crisis a challenge, and frankly is irresponsible to future generations. Among the other items on the president’s policy agenda are significant cuts to government spending. The cuts need to be significant, and to date, items discussed and/or cut may not move the needle. As illustrated in the chart “Projected Cost of Largest Spending Programs (percent of GDP)”, interest costs currently equal 8 percent of total revenue (which is about how much the government collects from the corporate income tax). The Congressional Budget Office estimates, within a decade, interest costs will require 18 percent of revenue and by 2050 they will require 35% of revenue.

We need to reduce our debt burden, but it will be a herculean task taking many years to complete. There are many aspects to the solution. We need to reduce spending, but the majority of our costs are mandatory. Politicians will need to make radical changes to our entitlement programs. To date, no administration has found a way to achieve the changes. The Wall Street Journal reported the U.S. spent $1.107 trillion on defense and $1.124 trillion on debt services last year. Some would say that any great power that spends more on debt services than on defense ceases being a great power. Thomas Jefferson, in speaking about future generations, was quoted as saying “to preserve their independence, we must not let our rulers load us with perpetual debt.”

Just as debt can sink a nation, it can also sink an individual’s chances for financial success. We are still early in the year, and it is still time to get a budget and a plan to reduce your debts. Though our mission isn’t to solve the nation’s problems, Spinnaker can help keep you out of debtor’s prison. Having just read the Berkshire Hathaway annual reports, I was struck by what Charlie Munger would say to Warren Buffett, “problems cannot be washed away, they require action.”

We look forward to taking action with you.

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