Is it time for Chicken Little to stop worrying about falling acorns? Depending on which version of the story you read, I’m inclined to believe that Foxy Loxy has been inviting us into his lair to someday, maybe soon, “eat” all of us.
When I say eat, I’m not talking literally, but I am talking financially. Let me explain my concern.
In 2008, I put together a lecture which I called ‘The Perfect Storm’. During my lecture, I pointed out that the United States federal debt had increased to $9.54 trillion (this was as of June 30, 2008). At that time, I was concerned that the US was on a crash course and that if something wasn’t done to slow their rate of debt accumulation, they were going to go bankrupt. It seems my concerns were unjustified, but were they?
Fast forward to July 31, 2012, where we see the US national debt had increased to $14,564 trillion, while Canada’s debt at that time stood at about $564 billion. Since then, the US debt has increased to $17,268 trillion while Canada’s has increased to $615 billion. From July 21, 2012 — December 31, 2013, the US has increased its debt by over 18%, while Canada’s debt has increased by less than half that amount.
When you compare the population of both countries, the US has about 9 times more people than Canada and their economy is also about 9 times bigger than ours. Excluding items that are not part of their debt calculations (like their zero funded Social Security Program), if Canada’s national debt is $615 billion, then by applying the same ratio, theirs should be about 9 times larger (about $5.53 trillion).
When you look at debt numbers in relation to population, you’ll find that the average Canadian owes about $17,000, whereas the average American owes about $55,000. This by itself seems bad, but in reality it’s even worse. Not everyone pays taxes, so you have to remove about half the population. In Canada, we have about 18 million taxpayers, whereas the US has about 115 million taxpayers. When you look at those paying the bills, the average Canadian taxpayer owes $34,000 while the average American owes in excess of $150,000.
These amounts are not sustainable, something needs to be done! Listen to Canadian politicians talk and you’ll hear words like ‘balanced budgets’ and ‘paying down the debt’. Listen to US politicians and all you ever hear them talk about is reducing their annual deficit. Very rarely will you hear a politician in the United States discuss paying down their national debt. I’m not saying that Canada shouldn’t be worried about increasing debt levels, they should, but as a geographical neighbor with highly dependent economies, they shouldn’t ignore these indicators from the South.
Maybe I can be likened to Chicken Little, but I can assure you I’m not alone. Most people believe that no one saw the US housing bubble and subsequent sub-prime mortgage meltdown coming. This was not the case. There were numerous books and papers written on the subject before it happened, the problem was, very few people read them.
Today most people don’t want to believe that the US could default on its obligations, but the simple truth is that nothing, I mean nothing, can continue to expand and not explode. It’s a simple law of physics. So is the sky falling? You tell me. And if it is, how can you best prepare for it?