Yesterday the Dow Jones Industrial average passed 18,000 points for the first time. This, of course, is not nearly as much a reflection of the health of the economy as it is of the fact that with interest rates around zero, stocks are pretty much the only place left to put one's money.
But there's another number starting with "18" that should scare the living heck out of us.
The good old USA is now extraordinarily in debt. We were pretty much badly in debt (about $10 trillion worth) before the current president took office in 2009, and six years later we're up to here in debt, having just surpassed an 18 trillion dollar obligation (yes, that's "trillion") to our Government's creditors.
I'm not going to tell you how high 18 trillion dollar bills stacked up would reach, because then we'd be talking about diversions and not about the serious issue they represent, which is itself pretty simple:
The US Government is authorized by the Constitution to perform certain enumerated functions in support and in defense of the citizens of our nation, and in protection of the sovereignty of the country and the individual states. To pay for those services, the Government is authorized to collect taxes and fees from its citizens based on their commercial activities, wages and transfers. When it budgets more spending than the projected taxes and fees it will collect, it must borrow to raise money to pay the excessive spending. As of right now, that obligation is over $18 trillion.
I suppose you could argue that's OK, as long as we can afford the payments, the "service on the debt." After all, I have a mortgage whose balance is about four times my annual gross income. Since the balance is spread over another 20 years or so, my debt service expense is well within my ability to pay it down. Of course, unlike the Government, I am not making the situation worse by buying a new house every year and adding to my debt.
My bank has a lot of leverage with me. Since I owe them a lot of money and they have a recorded claim on my house if I miss a payment, I have to be very careful in my dealings with them. And that's kind of the point -- when we keep borrowing as a nation because we can't control our spending, we develop the same situation, that of a creditor with leverage. Only ours are not as friendly as bankers are.
Who are those creditors, you ask? Oh, well, we needn't worry; they're all countries we are very friendly with, starting with the largest creditor in terms of holders of US debt -- you guessed it, the People's Friendly Democratic Republic of People Who Wouldn't Ever Mess with our Internet. That would be China, holder of about one and a quarter trillion of our dollars worth of USA debt. Close behind them would be Japan, but no worries there, we haven't fought a war with them in at least 69 years.
The largest nation-creditors (the majority of our debt is held by institutions and individuals) total about $6 trillion worth, or a third of our debt, including pleasant, chocolate-making places like Belgium ($300 billion) and less-pleasant, vodka-and-AK-47-making places like Russia ($100 billion).
The current Federal budget of about $3.7 trillion includes about $420 billion in debt service. Since total projected revenues are about $3.0 trillion, we are spending some $300 billion we don't have on services we can't afford, before we pay $420 billion we also don't have, in debt payments on borrowing we've already done to pay for things we couldn't afford.
Back when Barack Obama was a part-time US senator, he famously declared the level of debt to be "unpatriotic", words that you would think would have come back to haunt him, had we an actual journalistic community to challenge him on it. But it may be the one thing he has ever said that I would agree with.
Balancing the budget (including debt service) for enough years in a row to pay down the debt will not be easy, but it is certainly not a topic that we should avoid. Every additional dollar we borrow from China simply ratchets up the leverage that unpleasant set of communists has over us. Every additional dollar we borrow from anybody means that there is more and more competition for the lent dollar, such that when interest rates are finally allowed to float to meet the market, our Government is going to have to compete at higher and higher rates to finance its profligacy.
Debt is not a pleasant situation. My mortgage is on my mind all the time, even though I can afford the payment. It is long past time for Congress to step up to the plate and inform the nation of its intent to budget spending at a level of only what it can take in. If a healthy USA economy produces $3 billion in revenues in taxes and fees, then our spending should be capped at $3 billion -- including debt service -- China be darned. Belgium too, unless it affects our chocolate importing capacity.
Let's start talking about that, shall we?
Copyright 2014 by Robert Sutton
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