What we can Learn from the Debt Crisis
The Federal Government has a good way of managing a budget. It ignores it. With Congress at the wheel, the Government just keeps on spending and passing the occasional tax cut to keep re-election hopes alive and make sure income will never exceed expenditures. The Government is able to do this without any real consequence. You, on the other hand, can’t. When you spend more than you take in, you are staring down the bankruptcy barrel.
When the government overshoots its budget, which it does pretty much without fail every year, it creates what is called a budget deficit. The deficit tends to grow when we have a crisis like a pandemic. It also tends to grow when we don’t because we have other important stuff to pay for. This could include congressional pay raises as well as assorted pork barrel projects.
The reason the Government doesn’t worry about the deficit is because it can always borrow money to cover it. This is done by one Government agency, the Department of the Treasury, selling bonds to other Government agencies like the Social Security Trust Fund and the Federal Reserve Bank. And when Government agencies can’t buy any more, they sell them to foreign countries looking for favorable treatment from the US government. The whole thing feels like a giant money laundering operation.
Congress keeps a vigilant blind eye on the deficit during each annual budget cycle. When yearly deficits pile up to the point where no one can count that high, Congress turns its attention to the National Debt Limit. This is the line-in-the-sand number that sets an absolute, unequivocal limit on how much the government can borrow. Congress has voted to raise, extend or redefine the debt limit 78 times since 1960 — averaging over one vote per year. It has voted to reduce the debt zero times. The last time the US government had no debt was 1835. A pattern is emerging.
Lending money to the US Government is a no brainer because your investment carries the “Full Faith and Credit” of the Government. That means Uncle Sam guarantees you will get paid back with interest. Sam is able to do that because he can always borrow more money. From a personal finance perspective, this does not feel like a recipe for long term success. Yet China, Japan and a host of other foreign countries own almost 35% of US Government debt. One can only assume they invest in US Government bonds because their own economic system is even shakier.
And speaking of foreign debt, it is important to remember the difference between a budget deficit and a trade deficit. A trade deficit is when we buy a lot more stuff from overseas than we sell overseas. That means a lot of money is leaving the country. No one is sure sure exactly where it goes since it is hard to keep track of all the phones, computers, cars, small appliances, sneakers, and other stuff arriving at our ports on a daily basis.
As the storm clouds gather around the next debt ceiling discussion, what can we learn from our country’s fiscal policy? From a consumer perspective, it is like maxing out a fistful of credit cards then taking out a loan to pay them off. Then you take another loan to pay the interest on the first loan while you max out your credit cards again. This is legal for the government, financial suicide for anyone else.
