Tuesday, July 26, 2011

The Debt Thing

When a private individual or a business spends more than they make, they either get the rest on credit or borrow it from another source. If they do not pay back the money, eventually their line of credit is cut off. If said individual or business goes to a credit counselor or consultant about their finances, one of the first things they'll be told is to "stop unnecessary spending."

Now the government is a slightly different entity, in that it is not really allowed to go bankrupt. It also has an advantage over a person or a business in that it can print money to pay debts it owes to others (isn't that a neat trick?). Of course the result of printing more money is inflation, where an oversupply of currency reduces its value and raises prices. The government's been doing the money-printing thing for awhile now--it's called quantitative easing

The debt ceiling matter is something else. The point of a debt ceiling, in theory, is to set a self-imposed credit limit on the government's ability to borrow. Right now, there are two visions of how to fix the problem. The President and his advisors want to increase the debt limit and increase taxes to make up the difference between the federal government's current income and its expenditures. In a slight bow to reality, the President is willing to reduce expenditures, but mostly in "out years," which is to say any budgets in the future not covered by the current budget. The numbers sound impressive: trillions cut over the next ten years. But the reality is that no congress has ever considered itself beholden to promises made by previous congresses. So if the President's plan is followed, there is no guarantee that future "savings" will ever materialize. Raising taxes--increasing revenues--makes sense, but in a recession like we're still in, taxes will slow down the economy even more. And if the debt ceiling is raised, even if present and future spending are curtailed, there is still a good chance that the nation's credit rating will be lowered anyway.

The Republicans in congress have a couple of different visions, but their primary emphasis is on reducing--by quite a lot--the spending side of the equation. On the revenue side of things, they want to keep taxes at the same level that they have been since President Bush lowered tax rates to restart the economy after September 11. Another suggestion by the Republicans has been to let the country reach its debt ceiling to force drastic spending cuts. The declared downside of that approach is that the U.S. Government could be seen as defaulting on its obligations and, again, have its credit rating lowered.

The thing that makes me crazy is this: the President jacked up spending to some crazy number--3 or 4 trillion dollars--when the previous grand total was around 1 trillion, and then declared that Republicans were making drastic cuts to necessary services. Here's the problem: those "necessary services" were at previously unseen levels, but the President acted as if those new, astounding spending levels were the baseline all along. Only in Washington is a drastic reduction in the growth of spending considered a "cut." It's a shell game.

Anyhow, both sides of the aisle are playing a little chicken right now to figure out who's going to win this debate and control the rate of spending in Washington now and in the future. I like my mother's take on this business: "The governments [she was referring to the feds and the states] are like everybody else--they've been living beyond their means for years, and now they're paying for it." As are we all.

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