Trapped by Trillions: Why National Debt Costs You More Than You Think
Governments around the world have taken on eye-watering levels of debt, and whether you realise it or not, you're paying the price every day. In this post I want to discuss how national debt quietly erodes the populations wealth to provoke further thought on what it means for you and how to take back control.
Before we explore the effects of inflation however, it's worth touching briefly on Modern Monetary Theory. One of the key elements of MMT is that governments who issue their own currency can spend freely without the risk of default, since they can always print more money. While this sounds wonderful in theory, critics (myself included) argue this enables uncontrolled and reckless spending, the distortion of free markets, and accelerated currency debasement.
Whether you fall into the camp that sees it as pragmatic or view it as dangerous, it’s a core part of the modern fiscal mindset that drives the debt dynamics we’re going to cover in this post.
The Hidden Cost of National Debt
Even if you maintain control over your personal finances, many of us are still, in a sense, debt slaves. Why? Because our governments have failed to manage public finances responsibly for decades, leading to runaway debt levels that seem nearly impossible to service without drastic consequences.
Lyn Alden articulates this well here, especially in her breakdown of the US deficit. She's now re-purposed a Breaking Bad reference and created her own popular and apt meme: "Nothing stops this train" to describe the unstoppable rise of national debt in the US. As of now, the US national debt sits at an astonishing $37 trillion.
Let's just stop for a second to consider how truly mind blowing this figure is. Imagine you started spending one pound every second at the peak of the Roman Empire. By today, almost 2,000 years later, you would have barely made a dent.
Meanwhile, the UK's debt, though lower in nominal terms, is still an astounding £2.8 trillion. From a debt-to-GDP ratio perspective, the US has surpassed 122%, with the UK trailing at around 96%. It doesn't take a math whiz to understand that you're not in a good place when your debt is either far past 100% of your GDP or near to getting over that line. Bluntly put, if your personal household expenses far exceeded your income to this degree, you'd be in serious trouble.
How You Pay the Price
So, what does this actually mean for everyday people like you and me?
To more effectively appreciate the implications, we need to take a closer look at inflation and what it really means. Inflation can be split into two distinct but closely interrelated categories:
Monetary inflation: In simple terms, an increase in the money supply. The more monetary units introduced into the system, the less each existing unit is worth. The result is you end up using more units to purchase the same goods and services which can create the illusion that the goods are going up in price rather than the unit being exchanged for them going down in value.
Price inflation: More directly what we see at the checkout of the listed price of goods. As noted above and alluded to earlier that the two categories are closely related, this is often caused by monetary inflation, though it's more complex than that and can also be affected by supply chain dynamics, consumer demand, and broader economic behaviours.
As economist Milton Friedman famously put it: "Inflation is always and everywhere a monetary phenomenon."
Governments and central banks continually try to control and manage the rate of inflation through interest rate changes and monetary supply controls. The goal? Predictable debasement. You know that 2% inflation target they always mention in the news? This is just a different way of saying their target is a steady and consistent erosion of your money's value that feels "under control."
The reason this will continue to pass its way through to the population on a regular and persistent basis is that it will at this point take an extraordinary effort to start reigning in the debt. Very strict measures would need to be taken with across the board bi-partisan support for a sustained period to address the debt without incurring further uncontrollable spending along the way.
It’s notable trend that persists over decades that governing parties will seek their way into power through pursuing populist policies such as taxing the rich, reducing public spending on certain sectors and other well-intentioned actions which quickly become apparent aren’t possible once they get into power. You’ll note that I’m providing a rather favourable and conservative take on their ‘good intentions’ here when the cynic in me would opine that they’re fully aware of the limitations in budgeting and their ‘flawed’ promises when making them on their path to power.
Measures to increase taxation are often flawed in their logic with the ability at best to claw back small amounts in comparison to the overall debt and in practice having the negative effect of chasing away wealth and business meaning the tax rate may increase but the pie from which its taking from decreases – net gain equals little to none.
After an extended duration of failed promises and despair the population become disillusioned with the governing party and seek to put the alternative in. The promise…to fix the woes of the current government. Their excuse after their first four years will be ‘we inherited a mess’. Their resigned position by the end of a second term ‘we were unable to keep our promises, but the other party will be worse’
Conservative or Labour, Republican or Democrat, absent a strong and disciplined approach to addressing the debt situation it will continue to increase and as a result the insidious effects of inflation will continue to hit the population.
Will the US or UK collapse? It seems unlikely imminently but then again to paraphrase Hemingway, bankruptcy often occurs gradually then suddenly.
From Panic to Power
With the above considered and based on my reading of economic history it seems every generation has a moment that wakes up a new section of the population. Recently we had two large events in close proximity, COVID-19 with the explosive monetary expansion that followed alongside the GFC in 2008.
Each time inflation starts to become a hot topic again and each time more and more people are awakened to its insidious effects. I think many of us, myself included, go through a similar cycle of realisation:
Stage 1 - Enlightenment: "Wait, they’re just printing money? This isn't going to end well!"
Stage 2 - Panic or urgency: "OMG! Hyperinflation is coming to a country near us! I need to act now!"
Stage 3 - Evangelism and Shared Enlightenment: Telling friends, family, and basically anyone who will listen about your newfound discovery on the broken monetary system.
Stage 4 - Disillusionment: Realising for the most part people either don’t understand, don’t care or both "Whoa, that’s wild... anyway, did you catch the game last night?"
Stage 5 - Acceptance: Understanding that despite the magnitude of the situation given the mechanisms governments and central banks have in place it's unlikely this train will stop (crash!) anytime soon.
From as early as Stage 1 and continuing throughout the journey to Stage 5, you begin to focus more on what lies within your control. How to preserve your purchasing power and prepare for a future where fiat currency continues to erode in value.
Taking Back Control
Personally, my strategy focuses on accumulating capital and investing in ways I believe will outpace inflation and protect against currency debasement. It’s down to you to determine what the best investment approach is based on your personal circumstances as my intention here isn’t to provide specific financial advice or investment strategies.
If you want to ultimately escape government imposed debt slavery, it's not just about staying out of personal debt or over use of high interest credit. It's about actively managing your finances so you can invest, save, and allow your wealth to grow and compound over time.
Whatever approach to securing your financial future you wish to take, the intention of this post is to provoke sufficient thought on the topic to ensure you don’t leave yourself exposed purely to the whims of central bank decisions.
Breaking the Chains
They say nothing is certain except death and taxes. That may be true, but I believe another truth holds true also; we don't need to accept a life of economic servitude caused by poor government decisions. The earlier in life you reclaim your financial independence and make clear, deliberate choices to build lasting wealth, the better off your future self and as a result your family will be.