What the National Debt Means for You

Lately we have heard that D.C. will soon be voting on whether or not to increase our debt ceiling, this means in order for the government to continue to borrow to meet its obligations Congress must vote in favor of allowing additional borrowing.  Our current national debt stands just above 14.3 trillion dollars.  The national debt consists of all debt held by the public and government.  The last official measure we have of U.S. GDP stands at 14.1 trillion.  This means our debt to GDP (debt divided by GDP) currently is at 101%.  Another important figure to note is that our national debt is growing by about 1 trillion per year. U.S. GDP is estimated to grow between 2-3% in 2011.  It is widely understood on Wall Street that as debt approaches 100% of GDP the growth rate slows by about 1% due to the increasing amount of money being diverted out of the U.S. economy into the hands of foreigners who own our debt.

So what does this mean for you??? 

We keep hearing Tea Party supporters and conservative politicians stating we need to cut our spending.  But they rarely tell us why?  Our national debt growing hasn't ever been a problem, why should I care now?  Hopefully by the time your done reading this you will understand the consequences of a growing national debt.

A country for the most part isn't much different than a person.  A Nation has a credit rating just like a person does.  The main credit agencies that monitor countries are Standard and Poor's and Moody's.  Once a Nations rating gets cut, the interest rate it has to pay on its loans go up.  Just like a person with bad credit has to pay more for a mortgage or a car loan than a person with stellar credit. 

As our national debt continues to rise we are going to see interest rates in the United States continue to rise also.  This means a bigger portion of the United States budget will be making interest payments on our national debt.  We already spend 1 trillion dollars a year more than we bring in with tax revenue.  We are getting to a tipping point where the market (China, Russia, Japan ect.) are going to start demanding higher interest rates due to the fact that our debt to GDP is getting to the point of no return. 

There are 3 ways that we are going to have to pay the interest on our national debt.  Honestly I don't see how we can ever pay off the principal balance, just being able to make our interest payments in the short term is nothing short of a miracle.  The 3 ways to pay our interest payments on our national debt are: 1) Higher Taxes  2) cutting spending  3) printing money.  Lets tackle them one by one.

Our economy is in shambles, higher taxes right now would be the straw that broke the camels back when it comes to our economy.  Now the politicians would claim that they would only tax corporations and the rich.  But many corporations have the ability to pass those costs onto the consumer, which means the majority of the corporate tax would be paid by the average American.  We hear politicians say that we should tax the rich because they can "afford" to pay it.  And they are probably right, could Bill Gates afford to pay another 10% in taxes?  Yes.  But is it moral?  90% of federal taxes are paid by the top 10% earners.  Ask yourself this question, is it moral for you to vote to tax your neighbor when you won't be paying the tax?  My answer to that question is "no."    Canada just lowered its corporate income tax to 16.5%, Japan is lowering their corporate rate down to 25%.  The United States currently has a corporate tax rate of 35%.  with the move lower by Canada and Japan, we now have the highest corporate tax rate of all developed countries.  Now instead of blaming companies for moving jobs over-seas, all you Union people should be blaming government.  Any company with common sense is going to move factories over-seas if they are going to keep an additional 20% of their profits.  As you can see, raising taxes just isn't an option.

The second way to pay our interest and lower the national debt is to cut spending.  LOL!  Democrats don't have any plans on spending less, and republicans only talk about spending less, then turn around and raise the national debt dramatically.  82% of government spending is on Interest, Anti-Poverty Programs, Social Security, Medicare, and Defense.  That leaves 18% for other programs we could possibly cut.  Our interest payments will become a much bigger portion of our over-all budget once interest rates start to rise which seems to have already begun.  Good luck on cutting anti-poverty programs, social security, or medicare if you want to be re-elected.  Many conservatives are starting to realize we don't need the U.S. military in 130 different countries, there is possibly some savings that could come from there.  But if we do see major cuts in social security or medicare the U.S. economy will tank since retiree's will need to live on a lot less income.  Since our economy is built on consumption at home, instead of manufacturing products to sell abroad, less income to retiree's will hit our economy hard.  Bottom line is if we cut spending we are going to see our economy spiral into another recession that will make the last couple years look like a walk in the park.  Though in the long-term we will be better off as we need companies that should have never been created back in the bubble days of 2004-2007 to go bankrupt. 

The 3rd way we could pay the interest on our national debt is by having the Federal Reserve print the money.  That's the easy way out right?  WRONG.  Printing money creates rising prices.  More money chasing around the same amount of goods leads to higher prices.  It's simply supply and demand.  If we choose this route, prices for just about everything will rise dramatically, but your wages will only rise modestly.  Over-all, this means a lower standard of living for all Americans as we will be paying a lot more essentials like gas, food, energy, ect. 

So getting back to raising the national debt.  The politicians will decide to raise the ceiling on the national debt.  Their will probably be a few strings attached such as a few minor spending cuts here and there.  But nothing substantial, as any substantial cuts would cause immediate pain to whatever sector was cut.  This would all but guarantee whoever voted for those spending cuts will not get re-elected.  If politicians decided not to raise the ceiling on the national debt it would have a catastrophic impact on the financial markets.  Most of the Federal Government would be shut down due to lack of immediate funding.  While this is exactly what we need in order to come to terms with the situation, it won't be allowed.

We are going to continue to see a lot of jaw-boning from politicians claiming that we need to get our debt under control (which we do).  But in the end, politicians won't have the backbone to tell us the truth about the cuts that need to be made.  They'll put on a good show, but in the end their will for re-election will trump their moral obligation to do the right thing.  I pray that I am wrong, either way, the standard of living of the average American will have to come down in order to service this massive debt we have accumulated.  There is just no easy way out, I wish there was.  Our goal must now be to not succumb to the promise from politicians that if we hand them more power they can solve our debt problems.  It was politicians in government that made unreasonable promises that caused this debt problem, don't give them the power to fix a problem that they created.