Excessive Borrowing – Bad for Countries As Well As People?
If you continue to run a balance on your credit card every month, eventually your overspending will catch up with you. Collective interest charges will send you into a debt spiral – where you can’t even pay off the accrued interest, much less the debt itself. You simply can’t continue to spend more than you save every month.
You may respond, “Why not? America does it all the time!”
You’d be right – America has been in deficit spending for most of our lifetimes. Since World War II, when the deficit shot up to 29% of America’s Gross Domestic Product (GDP), there have been only seven years where the government ran a surplus – and four of those years were in relatively recent times (1998-2001).
The current national debt – the summary of all of our deficits plus the accrued interest – is over $20.6 trillion dollars. That’s a bit over $170,000 for every U.S. taxpayer. Ready to pay your share?
However, America’s “credit card” operates a little differently from yours and mine. There is a breaking point, but it’s far more complex than a simple household balance and far more tolerant of continued deficits.
If Only I Could Print My Own Money
Compared to households, countries have extra tools in the arsenal to control the effects of debt. They have better control of their income through taxation/distribution policies and can essentially print their own money.
In America’s case, we have such a large economy and long record of paying off debts that nobody is hesitant to buy American debt – whether it’s Americans investing in Treasury Bonds or foreign countries extending credit on trade deficits and other investments.
Economic growth has always enabled the U.S. to pay off debts. Much in the way your credit card company could care less how much you charge as long as you pay on time every month, creditors are perfectly happy to extend the U.S. credit knowing that we are good for eventual repayment.
The real trouble begins if America is ever in a position where creditors believe that we may not fully pay off our debts as a nation, or that high interest rates are required to cover our risk. That’s why Candidate Trump’s comments in 2016 about negotiating America’s debts with creditors was so nerve-wracking, and why the current budget deal is causing such concern. The current crop of leaders appears to have a different view of deficits, and perhaps basic world economics.
Uncharted Territory
The Trump administration’s budget plan is applying a stimulus at an odd time – when the economy has basically recovered from recession and unemployment is near all-time lows.
Deficit spending typically increases either out of necessity in wartime expansion (as in the Bush administration) or as an increase in government spending to kick-start the economy (as in the Obama stimulus plan). Post-stimulus spending caps instituted by Obama and continued through Trump’s first year led to years of relatively low deficits between $400 billion and $700 billion.
However, the Trump tax cuts and the recently proposed budget are expected to push federal borrowing near $1 trillion within 2 years – approaching 5% of GDP. That percentage has only occurred twice in the past 50 years, both in recessionary years (1982 and 2008). Such borrowing has never occurred in a strong economy. The threat is real for an overheated economy and the return of significant inflation and much higher interest rates.
If the bulk of the borrowing were directed toward infrastructure, it might be worth the risk since rates are still relatively low. However, the current infrastructure plans are relying mostly on state and private funds, with minimal federal spending to prime the pump.
America may not be placing too much on the federal credit card, but we are preparing to use the federal credit card in unprecedented – and potentially dangerous – ways.
The Takeaway
Sustained deficit spending can be as bad for nations as it can for households – but the size of the U.S. economy and the monetary tools available at the federal level give policymakers far more latitude. However, America is approaching a time where we take these tools for granted and aren’t interested in addressing our national debt at all – or verifying that we are getting value for our spending. That’s a problem, regardless of the size of our debt.
The only thing you can do about the deficit/debt is to make your feelings known to your representatives and vote for fiscally responsible candidates – if you can find any. However, you can keep your own fiscal house in order through realistic budgeting and superior planning.
Debt is useful when you keep the overall level of debt manageable and strive to gain value for your purchases. Buying a home that’s within your means or investing in an education that results in higher pay over the course of your lifetime is a sound investment. Racking up thousands of dollars of charges on your high-interest credit card is much harder to justify, unless you have that much disposable income – and if you do, you could probably put it to better use.
Be better than Congress. Be responsible with your own debt and get value in return for your purchases.
If you want more credit, check out our list of credit card offers.
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