Debt Tsunami

Terrence Wall, a well-known developer for Dane County and beyond, writes from a businessman’s perspective. Often, he writes about the intersection of politics and business for IB, and how pending mandates or legislation affect the bottom line. However, his topics vary.

As every business knows, there’s a certain point at which the amount of debt taken on is more than the business can sustain. Unfortunately, this is a lesson that many Americans have never learned, including the President and many in Congress (from both parties, by the way). Now, you may ask, how does the national debt affect you? And why should you care?

When the American government has taken on too much debt, the Treasury Department has to borrow the money and pay interest. When it borrows too much money, the government artificially forces up interest rates in order to attract all that capital. In other words, it has to compete by bidding up the cost of capital. When this happens, the cost of borrowing rises for businesses that borrow, and we end up paying more.

As an alternative to rising interest rates, the government prints more currency and uses those dollars to purchase Treasury bonds from itself in order to artificially drive down interest rates that would otherwise rise. (Wish I could do that!) This is what the Fed has been doing the last few years, empowering the administration to keep on spending without immediate consequences.

When the Fed prints large amounts of currency, like it’s doing now, it creates inflation, which stealthily steals money from consumers and businesses that must purchase goods and services, effecting a hidden tax on all of us.

Carelessly, Obama’s plan for spending will drive the government debt to 200% of GDP during our lifetimes (source: Office of Management and Budget/Congressional Budget Office), with his plan going to 900% of GDP in the outlying years.

This means that two to nine times the nation’s entire economic output would be needed to retire the debt. Worse still, over 80% of this spending is being locked in as “mandatory” with the (false) implication being that Congress can’t touch it.

The Fed has perversely conspired to empower the administration and Congress to go right on spending, and this is why Congress should not raise the national debt ceiling. At first, I believed Treasury Secretary Geithner that the federal government would default if the ceiling was not raised. But then I found out this dirty little secret: the federal government’s annual revenue is about $2 trillion, as compared to the annual interest cost on the bonds of over $211 billion. While there is a $1.4 trillion deficit, the fact is that there is plenty of revenue to ensure the interest and principal payments on the bonds are met.

The real truth is that the government and our elected representatives don’t want to be forced to cut back on all that spending and the associated favors and giveaways. If the debt ceiling is not raised, Congress and the administration would be forced, just like the rest of us have been forced over the last three years, to prioritize spending, make cuts, sell non-critical assets to raise cash, and rein in all that spending. Only by NOT raising the debt ceiling can we force a fundamental change in the nature of our representative government, returning this nation to the principles (restrained government) upon which it was founded.

Only by forcing tough decision-making can we require a debate about what services the government should be providing and what pay and benefits are appropriate for taxpayer-funded employees.

On the other hand, if we allow Congress to raise the debt ceiling, it will continue to spend until it hits the next debt ceiling, and do it again and again, just like it has for the past decade. Nothing will stop it, and the size and scope of the government will simply continue to increase until the country is bankrupt.

We either draw the line in the sand now, when we can, or the government will use the next financial crisis to take away more of our income and our rights.

My real fear is that when the final financial crisis does come as a result of the government spending us into default, our foreign creditors will surely take advantage of the situation just as the United States took advantage of Great Britain when that country was going to default on its debt to us at the end of World War II.

Over half of the public portion of our national debt is held by foreign governments or foreigners as compared to only 5% in 1970, with China holding the largest share. The interest payments we pay to China go to fund Chinese competition with U.S. companies. (Most Chinese companies are owned either in whole or part by the government.) With all the unsustainable federal government borrowing, we are eating ourselves from within, like a cancer. It’s not just the borrowing that’s bad, it’s the profits that our borrowing creates that fuel our national competitors to undercut our industries and steal our jobs.

And as our young republic discovered following the Revolutionary War, too much debt will threaten our national security, as creditors will be able to dictate terms of rolling over that debt. Too much debt makes you a slave to those you owe; you lose freedom, choice, and control. What if China decides one day to tell the U.S. that it won’t roll over our debt unless we agree not to defend Taiwan? Or force us to agree to allow oil to be denominated in Chinese yuan rather than in U.S. dollars? Then what?

In spite of the equivalent of tens of billions of dollars of gold pouring into Spain in the 1500s from South America, the most powerful country on the planet still went broke because the Spanish crown spent even more than it received. Great Britain’s pound sterling was removed as the reserve currency and denomination of oil at the insistence of the U.S. as part of a financial bailout negotiated by their own ally: us. After China spent its national revenue building the Great Wall, the government couldn’t afford to pay the solders to defend it, so the Mongols marched right in. History will repeat itself.

And the cost to consumers and businesses in jobs, competition, higher interest rates, and inflation and to our nation in terms of national security will be enormous if we as voters don’t insist that our government, which works for us, scale itself back to the size it was before 2007 and live within its means.

And forget the concept of the national debt being our children’s problem; it’s our problem because it’s rising at such a rapid rate that it will hit us between the eyes during our lifetimes. And if you’re part of the Millennial Generation (age 29 down to age 2), you should be especially concerned, because the peak earning period of your life is approaching, and another government-created financial crisis is going to set you back for life, reduce jobs, and reduce your overall lifetime earnings.

And if you still don’t believe the national debt impacts you, just look at it this way. You know your profit margin is just a few percentage points. If interest rates rise by just 3% (300 basis points) while the cost of your raw materials through inflation rises by 4% a year, your profit is wiped out.

But alas, it doesn’t have to happen this way. We have the power within each of us to Just Say No to the national debt. So spread the word: “Just Say No to Raising the National Debt.”

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