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Smashing the debt ceilingPosted Thursday, May 19, 2011, at 1:03 PM
When an addict can no longer afford his drug, what does he do?
It is shamefully common that the addict steals from mom and dad.
This week, the United States Government has borrowed all of the money it is allowed to borrow. To continue to fund the spending not covered by tax receipts, the U.S. Treasury is taking money out of government employees' retirement funds.
The United States Government has run smack dab into the debt ceiling. What does that mean?
Every single day the Government receives money from various taxes and fees. Every single day, the Government spends every single penny of that money plus all of the money that it can borrow. The debt ceiling is when the Government's line of credit is maxed out.
In order for the U.S. to borrow money (issue debt), it must be authorized by Congress. Congress passes a law, for example, allowing the U.S. to borrow an additional trillion dollars (issue $1 trillion in bonds).
As of today, we have borrowed some $14 trillion. Each and every citizen are co-signers on those loans and are obligated to pay them back. The $14 trillion debt is an obligation of approximately $46,700 for every man, woman and child, legal and illegal, presently in our nation.
Fortunately, economics for a nation is basically the same as for an individual. Here is what it looks like when you reduce the nation's finances to an individual level (dividing everything by our population):
* $18,300 income (all tax revenue from all sources divided by population,
* $23,300 planned spending (all spending, on and off budget, for every authorization), and
* $46,700 accumulated debt (the national debt divided by population).
If this were your financial situation, should you borrow more money? How comfortable would your lenders be? Have you ever borrowed money to pay your debts? How well did that work out for you?
How about borrowing to pay debts while continuing to live more than 25 percent beyond your means. Isn't the correct answer to find a way to spend less than $18,000 and start paying down your debt?
But if we don't raise the debt ceiling, won't we default on our obligations?
No. That is just the addict trying to scare you into letting them have one more drink, or one more hit, while they try to find a way to get sober.
By not borrowing more money, we would suddenly be limited to spending only what we make. We would instantly have a balanced budget and all of the planned spending above our income would simply go unfunded. Does that mean not making the mortgage payment? (Default on our bond payments).
No. The income already coming in will pay the monthly debt obligations, but it means supper will be meatloaf instead of steak and no more dining out.
But if we don't raise the debt ceiling, won't that make our creditors around the world nervous and make interest rates go up?
No. Are your creditors more nervous when you borrow more to support an extravagant life style substantially above your income or when you scale back, live within your means, and start paying your debts? Clearly, people are more willing to lend when you have a proven track record of responsibility and have the income to pay back your loans. Borrowing more when you are deeply in debt only makes things worse.
But I heard trusted government officials say that not raising the debt ceiling would trigger a crisis.
A crisis for them, not us. It is just like the crisis of the addict going through the DT's who will say anything to get a fix. Politicians declare things a crisis to persuade us to let them do things that we ordinarily not let them do. They want us to allow them to spend more and thus buy the votes of people who benefit from government spending. Suddenly, the politicians would no longer be able to buy votes and would also suffer the wrath and anguish of the people addicted to receiving government money.
Default and real crisis will come only if we continue to borrow more money. Our national credit rating has just been flagged. China, one of our biggest lenders, is selling two-thirds of its U.S. bond holdings. Because the Federal Reserve is keeping interest rates artificially low, below the rate of inflation, most American citizens decline to invest in bonds.
Moreover, the U.S. is already defaulting on its debt and passing the cost on to you.
There are two ways to default. One is repudiation, also known as bankruptcy. The other is monetisation, also known as inflation. When the government causes inflation the value of what the government owes goes down because the value of the dollar goes down as we are forced to spend more on everything as prices go up. There is no way for the citizens to avoid paying these bills, no matter how rich or poor.
The bigger the mountain of debt, the longer the fall and the harder the crash. Even if a crash is inevitable, it is much better to stop climbing the mountain right now.
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