Last week, I mentioned that the General Accounting Office released its GAAP study that showed that the federal government is $50 trillion ($50,000,000,000,000) in the hole.

Fifty trillion dollars conveniently bestows a somewhat surreal $166,000 of debt for every man, woman and child living in this country.

The majority of the projected government liability stems from future Medicare, Medicaid and Social Security payments of the ever-aging U.S. population.

But even if one subtracts the costs attributed to our entitlement programs, the federal government still owes roughly $8.4 trillion to those lucky holders of dollar-denominated U.S. government bonds…roughly $30,000 per person.

The average U.S. household has about $8,000 in savings, a mere 25% of the tab Washington has generously accrued on their behalf.

And that $30,000 per person excludes the $184 billion a year in debt service. Annual interest payments alone equal roughly $1,000 per person.

To put this in historical perspective, take a look at federal debt (in billions of dollars) as a percentage of our gross domestic product over the past 30-some odd years:

If growth rates for both categories remain consistent, our debt will surpass our country’s annual gross domestic product in the next eight years.

And that eight-year window assumes the American economic machine continues churning at a pace well above historical averages.

Remember, debts and deficits present two entirely different dilemmas. Politicians promising to reduce the federal deficit simply mean they promise to borrow less! It’s like saying I’ll substitute my debit card for my credit card…but unfortunately, the credit card debt already incurred doesn’t magically disappear.

The U.S. Treasury will be obligated to pay the mounting liabilities. There are two ways for Uncle Sam to collect revenues…to borrow money (i.e., turn on the printing press) or to increase taxes.

Politicians will offer their time-honored solution…tax the rich! Well, that may not be an option. Even a progressive tax system won’t be enough. We’re already taxed a great deal.

When asked how much people in the top 1% of income distribution should be taxed, most Americans choose a tax rate equal to, or in some cases lower than, the tax rates implemented today. Even for a family making $200,000 a year, the mean percentage found to be fair is 25%.

To put this in perspective, in 1995, a real family making $200,000 a year or more at about that time paid about 28.7% of its income in federal taxes of all forms. Adding in the family’s state and local taxes would take this number well above 30%, and close to 35%.

In other words, high-income people were already paying well above the median level that Americans surveyed thought fair.1 Even with the Bush tax cuts, the top 1% paid 31.3% of income in taxes of all forms!2

When asked how much “the rich” should pay in federal income taxes, former presidential candidate Al Sharpton responded, “Around 15%”!3

Tax hikes pose another problem. Americans aren’t saving. Americans currently perpetuate a negative savings rate. So repealing the Bush tax cuts won’t feel too good to a society living paycheck to paycheck.

To make matters worse, take a look at the household asset-to-liability balance sheet. The average U.S. household asset-to-liability ratio has gone from 10-to-1 in 1955 to slightly greater than 3-to-1 today.

As James Turk, founder of GoldMoney.com, points out: “When you take away the punch bowl, you are left with the hangover. We have to recognize we’ve far exceeded our ability to live at the level at which this country has been living for the past couple of decades.”4

It’s true that many pundits, as I, have been predicting the death of the American consumer for quite some time…And when that day occurs, small-cap growth stocks, especially those with a pile of debt, stand to bear the most burden when Dick and Jane’s credit cards have nothing left to borrow.

But there’s no fundamental need to predict the actual end to America’s gilded age of instant gratification.

There are plenty of other, and oftentimes better, opportunities to snag small-cap stocks with operations in foreign countries. Not only will many of these countries be the engines of future world economic growth, but they also pay dividends in currencies other than the failing U.S. dollar.

Right now, I have my eye on Israel, South Korea and Thailand in particular, three of the cheapest markets in the world today.

We’ll have more on this in the coming weeks. But for now, let’s end with this: Community activist Saul Alinsky once pointed out that “de Tocqueville commented, as did other students of America at that time, that self-indulgence accompanied by nothing except personal materialistic welfare was the major menace to America’s future.”

Maybe so…maybe not. The flaw, in my opinion, was not consumption itself, but rather, not knowing where to stop.

Sincerely,
Christopher Hancock
January 12, 2007

1 David R. Henderson, “Why Spending Has Got To Give” Pg. 8 Policy Review April & May 2006 No. 136
2 Ibid
3 Ibid
4 Interview with James Turk, Founder of Goldmoney.com “Yes, $8000 and Ounce” by Sandra Wand. Barrons May 19 1006 Pg. 35

Christopher Hancock

Christopher Hancock lives and breathes emerging markets. He travels extensively and utilizes his contacts across the globe to recommend the best international investments in the world. After working with Citigroup in Hong Kong on the challenges and opportunities associated with the forthcoming RBM flotation reform, Christopher left many of his friends behind and decided to return to the States to pursue a career in equity research.

Special Report: Imagine Getting Rich as Ignored Stocks Soar- How you could turn $200 into $1.2 million!

View articles by Christopher Hancock