This month, Peter and Jeff take on the United States’ $40 trillion national debt, discussing how we got here, what it could mean for the economy and whether AI-fueled growth could offer a way out. Plus, get their tips of the month for helping children and grandchildren get a financial head start.
Hosted by Creative Planning’s Director of Financial Planning, Jeff Stolper, and President, Peter Mallouk, this podcast takes a closer look into topics that affect investors. Included are in-depth discussions on financial planning issues, the economy and the markets. Plus, you won’t want to miss each of their monthly tips!
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Transcript:
Jeff Stolper: I’m Jeff Stolper, Director of Financial Planning at Creative Planning. With me is Peter Mallouk, President of the firm, and we are Down The Middle.
The national debt recently surpassed a new high of over $40 trillion, a massive number that can be hard to comprehend. For perspective, if you took that $40 trillion and divided it equally amongst every living person in America, including children, it would be about $118,000 per person. So a crazy, crazy number.
Peter, this is one of those topics that almost feels too big to understand. We’re talking tens of trillions of dollars, and it continues to grow. So let’s start with just the basics here. Talk us through how the national debt got so big.
Peter Mallouk: So I think the simple thing, there was a saying the Russians had a long time ago that they thought they were going to be able to take over the world without firing a bullet.
Because they said the United Kingdom would expand itself out of existence, Germany would militarize itself out of existence, the United States being a democracy would spend itself out of existence. And it’s crazy how prescient that has become.
I think the reason you have this is the way democracy works is people running for office want to make promises, and then we elect them and then they deliver on those. And the thing is they have a credit card that they can spend. They literally have a printing press, and they can spend more money than comes in.
So it’s no different than people are like, “Well, is it a little different?” No, it’s not. It’s actually no different than a family having a credit card where they can spend whatever they want, and then pass the credit card to their kids who then spend whatever they want and then hand it to their kids.
The issue is there’s all this incentive to be the hero and deliver on more Social Security or more bombs or whatever it is that America wants to spend money on, and there’s no punishment. There’s no pain that comes with that.
State budgets are different. Every state in the United States has a balanced budget. If you want to build roads or pay for Medicaid or whatever it is you want to do, there has to be some revenue that you’re getting from something, sales tax, income tax, property tax that’s paying for those things.
But the federal government doesn’t have that, and that is a recipe for disaster.
Jeff: Yeah, I think I looked and you mentioned in their defense and Social Security, actually, interest expense right now, I believe, is the second largest single line item of expenses in the country behind Social Security.
Peter: Yeah, this is why it’s becoming a crisis. So it’s one thing to get a credit card bill. It’s another thing to get a credit card bill where the interest is more than everything else that you’re buying that month. That’s when you really start to have a runaway problem.
Jeff: Yeah, totally agree. So what does this mean? I mean, you’ve got massive interest expense on top of just the debt in and of itself. What does this mean for the current and future economy?
Peter: You know, in the short run, the stock market just cares about earnings. What are companies going to make in the future? And right now companies are making a lot of money, and the stock market likes that.
Also, when there’s more money floating around a system like we have now, that inflates asset prices like publicly traded companies, privately traded companies, which is why public stocks, private equity, real estate, things like that are doing well.
The government keeps printing money and throwing it all over the country. Of course, prices are going to go up. In the long run though, one of three things has to happen.
One, either they have to tax the living daylights out of everybody combined with austerity. In other words, taxing everybody, selling off government assets, really, really tightening the screws, pretty much driving the economy into a severe recession to collect enough to contain what’s going on. There’d still have to be some cuts in spending.
Second, very, very severe cuts, almost impossible to imagine, massive defense spending cuts, massive Social Security, Medicare cuts. I mean, it’s going to be massive across the board. Republicans and Democrats would both hate what would have to happen.
Why would a Democratic official ever do that? They’re going to get voted out. No one’s going to win an election on the Democrat or Republican side talking about, “We’re going to spend less on all these things.”
The third thing is the Goldilocks scenario, which is that AI shows up and makes everyone so productive that there is so much money being made that the tax revenues go up so much that it takes care of everything. This is actually Elon Musk’s point of view. So pretty smart guy, maybe he’s right, but we’re going to need one of those three outcomes.
The most likely outcome, what you see governments across the world do, is typically they inflate their way out of the situation. The currency loses its value and you end up with a very big division between rich and poor.
Unfortunately, if you just let economics do its thing, that’s the most likely outcome. I think all of this is several years down the road. I think why we are talking about it more than ever is the pace with which we are racking on debt under the Biden administration, and especially the Trump administration, which he can never be outdone.
Biden had record deficit spending and now Trump is just trouncing that record. It is very clear that it doesn’t matter if there’s a Democrat or a Republican in office, that we are really seeing unfettered spending at a pace we’ve never seen before. And I think that’s why it’s starting to get a little bit of attention.
Jeff: I think it’s that paired with you’ve got midterms coming up. It’s also somewhat of a milestone like a 40th birthday. $40 trillion is this big number, so I think it’s a perfect storm, not just of the spending that you referenced but also the fact that it is just a milestone in terms of the actual number itself.
Do you see it as a problem for future generations? How do you think about that?
Peter: Well, it’s 100%. I mean, unless we have that perfect scenario where earnings just are so tremendously amazing that the tax base expands so much, then yeah, it’s the definition of a future generation problem. You’re handing this racked up credit card bill to somebody else who is going to pay for it one way or another.
Either the dollars they have in their account will be worth much, much less by the time the economic system is taking care of things, or they will be taxed much, much more with severe spending cuts. These are the outcomes that we’re sending, unfortunately, to future generations.
Jeff: Yeah. And those future generations unfortunately aren’t going to inherit a bunch of points with it like you could get with …
Peter: I don’t know, maybe they all have Southwest cards.
Jeff: Yeah, maybe, maybe. Let’s move to our tip of the month. Peter, what do you have for us?
Peter: So a lot of people talk about 529s. I love 529 plans. Those are our state-run plans where you can contribute money to pay for your kids’ college. It grows tax-free, comes out tax-free, can skip generations.
If you’ve got young kids, you want to save for college, it’s a great solution for 99% of folks. Open a 529 plan, talk to your advisor, fund it. Many states give you a little bit of an income tax deduction as well.
If you are wealthy, you don’t want to do that because when you make a gift to the 529 plan, you are using your annual gifting exclusion, which today is $19,000. So you would not want to do that.
Go ahead and just set up a trust for your kids or grandkids, put $19,000 in there for them, and you’re allowed to pay their college expenses, or any education expenses, directly and not have it count against your exclusion.
So different advice for the very wealthy and for the vast majority of Americans.
Jeff: Mine, I’m going to go with something back-to-school related. So we’re coming off of summer when many kids have a summer job. Mine when I was growing up, I did a donut shop, I did an ice cream store, I did landscaping. So something like that. I’m sure if you have kids listening to this, they just came off of some kind of job where they made maybe some amount of money, well, take that as an opportunity to open and fund a Roth IRA for them.
For any dollar that they earn, you have an opportunity to contribute on their behalf to this account. And over time that can really, really accumulate to something. So take a look, see how much your kid earned.
They don’t have to necessarily spend all of their own money to contribute to the Roth IRA. Maybe they match whatever you do dollar for dollar or vice versa. So that’s my tip.
Peter: Good tip.
Jeff: I’m Jeff Stolper, Director of Financial Planning at Creative Planning. With me has been Peter Mallouk, President of the firm, and we are Down The Middle.
Disclosure: This show is designed to be informational in nature and does not constitute investment advice. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy, including those discussed on this show, will be profitable or equal any historical performance levels.
