Why you’re right to feel uneasy about the economy
A lot of people are fond of using the term, “Up to my ears in debt.” The saying evokes the frightening idea of water rising up to just the point where you can barely breathe. It’s the time right before you go completely under and drown.
Thanks to some recent numbers released by the Congressional Budget Office (CBO), we now know that we are in fact in debt up to our ears.
According to the CBO, the current federal debt level will rise to 70% of GDP by the end of the year, which will be higher than any time in U.S. history, save for World War II.
It gets worse
And according to the CBO, that is just the beginning of our debt troubles. “CBO says that on present trend the national debt will hit 90% of GDP by 2022. It then balloons to 109% by 2026 — that would be the all-time WWII peak — and approaches almost 200% of GDP by 2037.”
As the CBO comments, if debt levels reach that high, it would increase “the probability of a sudden fiscal crisis, during which investors would lose confidence in the government’s ability to manage its budget and the government would thereby lose its ability to borrow at affordable rates.”
In the CBO’s absolute worst-case scenario, the debt levels in the forecast could reach 250% of GDP by 2035.
What would happen then? They don’t know. “At that point, the CBO’s economic model breaks, because so much debt is so far outside ‘historical experience’ and the CBO’s ‘assumptions might no longer be valid.’”
It gets expensive
Throughout this financial crisis (and yes, we’re still in one), I’ve said that life is about to get more expensive. In some ways it has. For instance, gas prices are putting the pinch on the middle class right now – as are food prices.
But what will really make life more expensive are the higher taxes that will be required to pay the interest on the soaring interest costs to maintain these levels of debt. And unless there is a miracle, that is exactly what will happen at the end of the year when the Bush-era tax cuts expire, costing the average taxpayer about $1,000 each year.
Of course there’s a cost to this as well. According to FOX News, “Combined with federal spending cuts scheduled to take effect next year, the combination of tax increases and spending cuts would probably send the U.S. economy back into recession, according to a recent CBO study.” And recessions reduce GDP and personal income, which makes life more expensive, increases debt-to-GDP percentage levels, and starts the whole vicious cycle over again.
It gets better (for some)
This may all seem like a lot of doom and gloom. But don’t get discouraged. While I’ve been saying that life is about to get more expensive, I’ve also been saying that this is the biggest wealth transfer in history.
For those with financial education and courage, this is the chance of a lifetime to get rich. While there are many essential things that are more expensive today such as gas and food, there are also many assets that are cheap.
For instance, real estate is cheap and so is the debt to buy it, which is at historically low levels. Also, there are good businesses that have over-leveraged themselves and are going out of business. This increases opportunity for your business to acquire assets from those businesses as they go out of business. And if you’re in a position to hire, there is great talent practically begging for a job who you can hire to build your team. The opportunities for the person with the right financial education and the right frame of mind are nearly endless.
But it only gets better for some, not all. I don’t want you to be complacent. This is a time for urgency…and there’s not much time left. You must be proactive and increase your financial education. And then, you must act on your knowledge. It’s the key to surviving the coming sea of debt.
Which side of the coin will you be on? Will you be riding a luxury yacht on this sea of debt…or will you go under with those who never had a chance?
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