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Is our Country on a Collision Course?

Is our Country on a Collision Course?

As an accountant and auditor I have been trained to make assessments on the health of organizations. In fact, we even have a special model we use called the Altman Z-Score. This mathematical formula determines the probability that an organization will go into bankruptcy. As I read Lawrence Kadish’s article titled, Taking the National Debt Seriously in the Wall Street Journal, I just kept thinking of the Altman Z-Score.

Our national debt is approximately $12 trillion dollars and currently 40% of all individual taxes collected are used just to pay the interest cost on this loan.

The Office of Management and Budget (OMB) projects deficits of about $9 trillion over the next 10 years (this does not include any national health care legislation that is being proposed).

This would more than double our national debt. What is really interesting is the current rate of interest on this debt. For many years our government has been selling shorter term debt as opposed to locking in slightly higher rates for long term debt. This, of course, lowers our cost of borrowing, but hurts us long term. In 2009, the average rate of interest on the debt was only 3.2%.

With the current deficits and the continual printing of money, most people expect inflation to come. With this higher inflation, the inevitable higher interest rates will come. Many people over the age of 40 remember the Carter years in the White House when treasury yields reached 15%.

You do not need to be a CPA to figure out we are on a collision course with pain. If our cost of borrowed money were to increase to 15% and our deficit were to grow as projected to $20 trillion…a massive amount of our tax receipts would be required, just to pay the interest on the national debt.

As a business owner, if I expected interest rates to increase I would want my CFO to lock in long term rates as much as possible. The main reason our current politicians do not do what is prudent for the long term is they are mostly concerned with getting reelected. This is not a democrat or republican issue. Both sides have been guilty of fiscal irresponsibility.

I fear the only way to change our course and avoid the inevitable pain, is to elect politicians who have some fiscal responsibility. Otherwise the Altman-Z score will calculate: Bankruptcy is Imminent.