Why Debt is Dumb

There are some, including our representatives in Washington, that seem to believe that debt works differently in the White House than it does in our own houses.  Honestly, we should all take comfort in the fact that debt doesn’t work differently in the White House. If it did it would indicate that government has complete control over the economy and all financial matters. With the understanding that debt is the same whether it is for a business, a government, or a home it becomes easier to see dangers our nation is approaching.

A simple comparison may be of help.  Imagine a person who expends all of his income and has nothing in savings, and so turns to debt to obtain his wants and survive his emergencies.  He eventually comes to a point where he owes a significant portion of his income just to the minimum payments (interest) on his debt.  The time will eventually come when another emergency cannot be paid for because of a lack of creditors willing to extend the man further credit due to his inability to pay them back.  What is worse, the emergency may in fact be something that would not have required debt in the first place, but he can no longer afford simple turns of fate due to the staggering amount of interest he is now paying.  This comparison is to show the effects of debt in relation to the income of a person.  The same consequences are true for a business or government.

In relation to government we can consider taxes as income. The yearly budget almost always exceeds anticipated tax revenue (deficit spending).  Still, government seems to feel okay when it incurs debt based on the fact that it knows that tax are usually a small portion of the countries Gross Domestic Product (GDP-total value of goods and services of the nation.) Think of this in our example as this individual feeling comfortable with a huge debt to income ratio because he has a huge summer estate he could sell if needed.

This large GDP allows some politicians to feel that the total debt burden could be relieved by dipping into the much larger potential revenue of the country.  The logic goes that they can always raise taxes to cover deficits in revenue to pay back debt.  But what could happen if the debt burden becomes too great for the tax revenue, and potentially too great for the GDP as a whole?

According to an article by Steve McCann of the American Thinker the national debt was at 40.2% of the GDP in 2008.  The author concludes that the United States remains fiscally responsible if it’s debt is less than half the GDP.  But, according to the Obama administration’s predictions for spending the debt will be near 72% of the GDP by 2012.

If we return to the comparison, while a person with a debt to Net Worth (income, and all sell-able goods) ratio of roughly 70% could continue making payments, and in fact eventually repay all his debts, that individual could not weather emergencies without incurring additional debt, and would not be giving money to aid the poor or rebuild his neighbor’s house.

The United States government has always been wealthy enough to give aid in domestic and international disasters.  But is it possible that as the debt approaches 3/4 or more of the GDP she’ll find the money harder to come by when disaster strikes?  Just as your neighbor who is struggling with debt finds it impossible to be as charitable as they would like, and begins making many decisions based solely on their financial ramifications; will government begin making decisions based on financial considerations?  Further, at what point in time does the government seek credit from another country or institution only to be told the interest rate is now extremely high, or worse, they do not qualify?

It is also not surprising that government policies favor inflation, since inflation makes it easier to repay debts incurred.  This has ramifications on our society as well, since it discourages savings and encourages debt.  People in our society are more likely to incur debt, therefore leading to an extremely consumerist society, which we see evidence of all around us.

It is my opinion that there are two ways to correct these trends as a people: first, be personally fiscally responsible (basically: stop using debt to get things you can’t afford) second, demand (by vote) that Washington not spend money that it has not already raised.

It’s easy to vote for the politician who promises to open the treasury halls of government for the benefit of his constituents.  But we must realize the future cost of giving away money that is not actually there.  We must practice restraint and be willing for even our favorite programs (military, health care, roadways, social security…) to take cuts; so that we may begin to pay down the national debt.  If we are not willing to do this we may come to a future day when needed money simply is not available.

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