The Private Equity for Families Blog

Death By Compounding

The Congressional Budget Office usually does a good job of predicting the financial future for our country. Its 2017 Report looks out over the next 10 years and predicts many trends that we all know:

  • Budget deficits will grow and accelerate
  • Interest rates on government debt will rise to almost 4% in 2027
  • Government debt will grow from $14 Trillion in 2017 to $25 Trillion in 2027- that does not include entitlements
  • Inflation will be a tame 2%

Based on $25 Trillion of debt in 2027 each 1% increase in the rate the public demands for government debt in 2027 is $ 250 Billion Increase in the budget deficit. If the world suddenly decides it will not finance our deficits at 4% and instead charges 10%, the incremental interest bill will be $1.5 Trillion. The total interest bill in 2027 under that scenario would be $2.5 Trillion. The CBO acknowledges that after 2027 interest rates are likely to accelerate.

Default, currency debasement, massive inflation and financial Armageddon are possible. According to Gene Epstein in a Barron’s article dated Oct 23, 2017 entitled “There’s No Easy Fix For Our Mushrooming Debt” The US Balance sheet can’t be liquidated for more than $8 Trillion. He thinks the Parks System could fetch $2.1 Trillion, Federal Lands could get $5.0 Trillion, the Strategic Oil Reserve Could get $136 Billion. Student loans are $1.5 Trillion but Mr. Epstein does not put any liquidation value on that asset class. Maybe you could collateralize our defense systems with the Chinese and Japanese creditors? In any event the holders of US Debt are woefully under collateralized.

 An Article V Convention

I never realized that prior to the Trump election 30 state legislatures had approved a call for constitutional convention to enact a balanced budget amendment. At the beginning of 2017 you only needed 7 more states to make the convention a reality. Since the Trump victory the legislatures in Arizona, Maryland and New Mexico rescinded their prior calls for the convention. Many fear the Convention would be a “free for all” with agenda items reflecting the huge divisions in the country. What starts as a balanced budget inquiry might sink the Republic.

Death By Compounding

I don’t know which we should fear more: (a) An Article V Convention in 2018 to decide the future of the United States including a balanced budget; (b) Chinese and Japanese faces on Mount Rushmore in 2020; (c) $20 Starbucks coffee and $500/BBL price of oil in 2024 or (d) a one time “Your Fair Share” assessment equal to 50% of your net worth in 2027. Death by compounding, however, is certain. Even with a balanced budget in 2027 and all years thereafter compounding interest at 10% on $25 Trillion would lead to $50 Trillion of debt by 2034. After $50 Trillion I can no longer do the math.


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Rob McCreary

Rob McCreary has more than 40 years of transactional experience as an attorney, investment banker and private equity fund manager, and has spent his career in building entrepreneurial organizations with successful track records Founder and chairman of CapitalWorks, he is responsible for developing and maintaining senior relationships with investors and portfolio governance.

This blog represents the views of Rob McCreary and do not reflect those of CapitalWorks or its employees. This blog is not intended as investment advice. Any discussion of a specific security is for illustrative purposes only and should not be relied upon as indicative of such security’s current or future value. Readers should consult with their own financial advisors before making an investment decision.

Private Equity for Families Blog | CapitalWorks Private Equity Cleveland Ohio

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