Do You Understand Our Financial Malaise?

My interest here is to provide a very basic explanation of our country's financial condition and not an analysis of "who shot John," or a prescription for our salvation. With that in mind, I'll keep my personal politics, philosophy and beliefs out of my argument.

During the last several months, I've engaged a lot of very smart people in discussions about the USA's deficit/debt problem. I've learned the following things:

* Many people... maybe even MOST people... don't know the difference between our national debt and the deficit.

* Many people actually believe that we still operate on the gold standard (we don't and haven't since 1971).

* Lots of folks (including, apparently, our Congress people) think that if our government needs more money, it can just print it with no detrimental side effects.

* Apparently people think that it's OK to be virtually owned by China.

The following dialogue, which is to serve as a tool, is typical of discussions I've had on the subject of late:

Them: "So Rand... I don't get this whole deficit/debt thing. What's the difference, and what's the big deal?"

Me: "Let's start here: The deficit is the annual difference between what the federal government spends and what it takes in, in taxes. Currently, the government is spending about 40% more than it takes in. Here's an analogy to make my point clearer and more personal. Let's say that you make $200,000 a year. If you were operating with the same deficit as the government, you'd be spending $280,000 a year. I also didn't include your personal income tax implications in my example."

Them: "What? I couldn't do that!"

Me: "Of course you could. You'd go to the bank and borrow $80,000 so you could pay the difference between your living expenses and your income."

Them: "Yes, but then I'd be in debt to the bank, and if you include interest and depending on the length of the loan, that $80,000 could end up costing me $250,000 or more."

Me: "Exactly. Now, what if you had to do that every year?"

Them: "You mean borrow $80,000 every year?"

Me: "Yep."

Them: "If I did that for four years in a row, I could be in debt around $1,000,000."

Me: "So let's review where we are so far. You make $200,000 a year, and you spend $280,000; that's 40% more than you take in, just like the federal government. After four years, you are $1,000,000 in debt. You have to pay your debt and cover your expenses, so you have to continue borrowing more and more money. At some point, banks will then only loan you money at ever increasing interest rates because you are a bad bet for them. Those increased interest rates result in your debt multiplying multifold. Eventually, you can't get out from under."

Them: "So how does the government make up the difference?"

Me: "Here's what the government does: It sells bonds. When you buy government savings bonds, what you're doing is loaning money to the federal government."

Them: "What? That's not true!"

Me: "What do you think bonds are?"

Them: "They're bonds, not loans."

Me: "Bonds ARE loans. When you buy corporate bonds, you're loaning the company money. When you buy government bonds, you're loaning the government money."

Them: "I didn't know that! So that's how the government borrows money?!"

Me: "It's a gross oversimplification, but yes. There's more: What if you went to a bank to borrow one of the many times you had to do that and you said this: "I promise to get my financial house in order if you loan me more money. Next year and for the next ten years, instead of spending $80,000 more than I make, I'll only spend $40,000 more than I make. Isn't that great?"

Them: "I'm still increasing my overall debt but reducing the amount of my annual deficit! You're not telling me that's what our government is doing, are you?"

Me: "That's exactly what I'm telling you. Our President and both parties in Congress are arguing over how much to reduce the deficit. No one is talking about the fact... AND IT IS A FACT... that out debt will continue to grow exponentially because we cannot service our debt, PERIOD, under any of the scenarios."

"The Country is broke, and we have a bunch of political hacks debating whose irresponsible approach is the best and patting themselves on their backs for their respective solutions."

"Unless things change fairly quickly (and they WON'T), we are in very deep yogurt for a very long time. So, by the way, are your children."

My realization that our political system and its players are either disinclined or unable to deal with problems of this magnitude informed my migration to the Libertarian Party several years ago.

Copyright 2011 Rand Golletz. All rights reserved.