Resistance Begins at Ohm!

Friday, March 26, 2010

Could you borrow 90% of your income?

When could you ever pay that back, even if you lived forever? You couldn't even make the minimum payments.

That is the core issue with government spending beyond its means. Even if they say it is just for a little while because the economy is bad, the consequences go on for decades. There is no "little while" borrowing because there isn't any income to pay it back - not next year, not next decade. The money coming in is just going back out to pay for current obligations (social security, medicare) plus last century's debt -- for the Iraq war, for Katrina, for all the stuff we did without bothering to budget for it.  On top of that, add all the new spending, up 20% from 2008 levels for non-military programs. Well, those chickens are coming back to roost already. Yet we are going to keep spending beyond our means, ignoring the tsunami headed toward us while the harbor is draining as we speak.

Here are two articles for your consideration:

The debt tsunami:

The federal public debt, which was $6.3 trillion ($56,000 per household) when Mr. Obama entered office amid an economic crisis, totals $8.2 trillion ($72,000 per household) today, and it's headed toward $20.3 trillion (more than $170,000 per household) in 2020, according to CBO's deficit estimates. That figure would equal 90 percent of the estimated gross domestic product in 2020, up from 40 percent at the end of fiscal 2008. By comparison, America's debt-to-GDP ratio peaked at 109 percent at the end of World War II, while the ratio for economically troubled Greece hit 115 percent last year.

The bond harbor draining:
The recent rise in Treasury yields (interest) represents a “canary in the mine” that may signal further gains in interest rates. Higher yields (interest) reflect investor concerns over “this huge overhang of federal debt which we have never seen before,” Greenspan said.

Not that I am a fan of Greenspan, but he makes several compelling points:

  • Increased interest rates on bonds will increase mortgage interest rates, making a housing recovery even more difficult.
  • Increased interest rates also dampen capital investment, which affects the ability of industry to increase output - thereby increasing GDP.
  • Historically, there has been “a large buffer between the level of our federal debt and our capacity to borrow,  that’s narrowing.” 
Meaning what we owe is increasing, and what we can borrow is decreasing. When the two intersect, we are insolvent. We're already bankrupt.

Greenspan said in an interview last year that a consumption tax was a likely response to a widening budget deficit. That may not be sufficient when the gap is caused by a failure to cut spending, he said today.

If you take a share of the money spend out of circulation and transfer it to the government (who transfers it overseas as interest payments) guess what - less to spend here, less demand, less productivity, fewer jobs, lower personal income, less spent, more percentage removed in taxes, less to spend here,  less demand, less productivity, fewer jobs, lower personal income, less spent, more percentage removed in taxes, less to spend here,  Get the picture? All because we borrowed more than we can pay back.

It works the same in your household. If you increase the amount you have to pay for your mortgage and credit cards (and I bet your credit card interest already went waaay up), you have less to spend at Safeway, Target, your local Ford dealer, dry cleaner, etc. The businesses represent a lot of people who are working for your money. When your money isn't coming in, they won't have jobs.

Maybe this is what happens when we elect lawyers to run the business of government.

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