The Rule of 72

On February 1st, the New York Times posted an interactive chart of Obama's 2011 budget proposal. The chart provides a nifty feature which allows you to see the increase/decrease of specific budget items as you move your mouse across the screen. You can also compare the dollar amounts from 2010 to 2011 for any budget category.

Congress has discretion over how much money is spent on items such as education and defense, but is limited when it comes to the big entitlement programs. Without "reform" (translation: cuts), these programs will soon force the government into insolvency.

The chart shows that medicare spending increases from $462 to $498 billion, an increase of 7.8%. The rule of 72 implies that this amount would double in just 9 years to approximately $1 trillion in 2020! And that's using the 7.8% current rate of increase. Aging demographics and ever rising medical costs imply that the rate of increase will only go up.

Another area of concern in the budget is interest payments. In 2010 that amount shows $188 billion. In 2011 the estimated interest payments are $251 billion; an increase of 33.5%! As the national debt increases, combined with rising interest rates, at some point the government will be unable to service the debt.

It is imperative that the economy grows faster, or at least keeps pace with debt. Unfortunately, that isn't going to happen. In order for the government to survive long-term, Americans must be willing to forfeit the entitlements which have become institutionalized and depended on by most of the citizenry. That isn't going to happen either.

The current path simply is not sustainable, yet politicians will never make tough choices and the populace would never allow them to if they tried. How will it end? Default? War? Monetization leading to a hyper-inflationary depression? Anarchy? Revolution? The answers to these questions will be played out over the next decade. It will be an interesting ride.