Government Debt: A Parasite Consuming the Economy

‘Nothing can be created out of nothing’
Lucretius

‘This is what I call Gundlach’s Rule of Investment Risk. If you run things and you try to get them very smooth, without ever any downside, you’re trying essentially to eliminate the frequency of problems.  I believe the frequency of problems times the severity of problems when they occur equals a constant. Frequency times severity equals a constant.  That is Gundlach’s Rule of Investment Risk.  When you try unnaturally to push into the future problems, and quantitative easing is designed to do that, you end up increasing the severity of the problem.’
Legendary investor Jeff Gundlach

Titus Lucretius Carus was a Roman poet and philosopher who died in 55BC.

Jeff Gundlach runs the highly successful US$50 billion DoubleLine funds management company.

What does an ancient poet have in common with a billionaire investor? They both agree you cannot manufacture something from nothing. There will be a price to pay for this conjuring.

Gundlach has made a fortune from investing in bonds (debt issued by government). His continued investment success is highly dependent upon him understanding the machinations of the US government bond market — how the market evolved, maturity dates, the prospect of further issuances, interest rate movement, etc.

In 2012, Gundlach delivered a controversial presentation comparing the United States to the Roman Empire. Gundlach’s presentation went into great depth on where the trillions of dollars of government debt have been spent (or, more accurately, squandered). Defense, health, and welfare (the big three) have by far been the major drains on US tax dollars.

The government may have accrued the debt, but the debt servicing obligation belongs to each US citizen. The following chart from Gundlach’s presentation shows the household debt load that has been foisted upon the shoulders (wallets) of US citizens.

In the 1970 s, a median household income of $44, 762 supported a national debt per household obligation of $20,564.

In 2011, median household income had risen 13% to $50,876 while the national debt obligation went stratospheric with a more than 400% increase to $84,793.

The only reason this imbalance can be supported is due to the reduction of interest rates over this period from 15% to 1% .

When money is virtually free, you can have as much of it as you like — which is precisely why an app company with non existent revenues can be valued for billions of dollars. The problem with this exponential debt scenario comes when the cost of money rises.

click to enlarge

If we go back to the chart, you’ll see the inset chart shows the areas of expenditure that would both enrich society and ensure continued service quality — research and development and Infrastructure spending — declined over this period. These are not vote winners.

The US defense and medical sectors are very powerful lobby groups, while welfare spending is a guaranteed vote buyer.

The parasitic nature of the big three drained the host.

Read the rest of this article at The Daily Reckoning