As most of you know I am no fan of the United States Government, especially when it comes to how they spend money. Republicans and Democrats alike have continued to spend like crazy on some of the most ridiculous and unnecessary budget items and it’s put the country in a terrible situation.
There has been talk from many groups about whether or not the Government should raise the debt ceiling. Some say we need to stop with the out-of-control spending and others contend that not raising it would cause the U.S. to default on it’s debt obligations.
I’m sure you don’t have to think too hard about where I stand on this issue, but let me explain by first giving you an example that may hit close to home.
You are deeply in debt. You have a mortgage that’s probably upside down. You drive a car (or two) with car payments that are also upside down. Every credit card you have is maxed out and you have no available credit without trying to get yet another line of credit from the first person that is stupid enough to give it to you. (or smart enough depending on how you look at it)
You have two choices here. You can stop borrowing all together and get your financial house in order — pronto! — or you can continue the bad habits that got you in this mess in the first place by getting another loan or credit limit extension.
To me, that doesn’t sound like a very hard choice to make! In fact, I don’t think it could be any more obvious.
You certainly have no business borrowing more money when you’ve already proven that you can’t handle prior obligations. So if you shouldn’t “raise your debt ceiling” why should the Government? As the saying goes, “What’s good for the goose (you) is good for the gander (the government).”
I find it severely troubling that there is even any debate about what the U.S. Government should do. First you get spending under control by cutting the budget, as painful as that may be. Some people will not like it just like some families don’t like it when they’re told they have to cut back because of a job loss, medical bills, or out-of-control spending. It is so utterly irresponsible for the Government to say we haven’t managed money well up to this point, but if you raise the amount we can borrow (past the current 14 + trillion) we’ll be just fine.
When your financial expenditures exceed your income it is ridiculous to think more money will solve the problem. Digging your debt hole bigger than it already is is a recipe for disaster. The Government has conned everyone into believing that just because it’s the Government that it has different rules because failure isn’t an option. The “too big to fail” slogan gets thrown around to justify spending more and the one question I have is, where has it gotten us?
14 trillion dollars in debt, that’s where!
I’ll leave you with this awesome quote from someone who apparently understands money management better than the U.S. Government.
“If your outgo exceeds your income, then your upkeep will be your downfall.” — Bill Earle
I wrote this post to see what you thought about the whole debt ceiling debate, but also to provoke a discussion about your financial situation. If the example I gave in the beginning of this post sounds like you and you are still borrowing money, perhaps it’s time to consider a different path. You can either head towards financial freedom or a lifetime of struggle and despair. The choice is yours. If you do the opposite of what the U.S. Government has done, chances are you are headed in the right direction. 😀
Photo by Dave Dehetre
To be sure, I am no fan of unproductive, inefficient gov. spending. It causes inflation. In fact, I am huge advocate of slashing the federal budget, expecially military and medicare spending. That said, however, comparing the US gov. to households, or municipalities, or states even is like comparing apples to oranges. They are fundamentally different, and not enough people take the time to understand that fact.
Whereas households, cities, etc., have budget real constraints, the US gov. does not. Whereas I can’t just print $100 to pay my mortgage this month, a city can’t print $100 to repave a road, Greece can’t print more euros to pay its creditors, but the US gov. can. The US gov. issues it’s own currency, and creates a demand for it by forcing people to pay their taxes in that same currency. It also only issues debt in USD. If our debt was denominated in Yen or Euros, the federal gov. couldn’t just print more to pay it’s creditors–it would be like you, me, municipalities, Greece, etc. If we were on a gold standard, the fed. gov. would be like you, me, municipalities, etc. But it’s not. Therefore, to say that they should have a balanced budget like a household or a local municipality is accurate because they don’t have the same constraints. The fed. gov. simply needs to be concerned with printing money beyond the productive capacity of the economy because doing so causes inflation–too much money chasing too few goods. To argue and fear monger about the debt ceiling, etc. is unproductive and politics at its best (er…worse). Virtually every single major depression/recession in our nations history has been preceeded by a balanced budget–look it up, it’s true. Again, let’s cut, but let’s also be real about how our monetary system works and stop scaring people for political gain.
not true. Without the gov. spending money into existence (i.e. issuing debt), you, me, cities, states, etc. don’t have any money to save, spend, pay down debt, etc. In other words, it is imperative for the US gov. to run a deficit. The big question should not be whether (the govthe gov. be spending before they risk inflation (refer back to my first sentence in this post. Raising
Hi Jeremy thanks for your comment. It looks like some of it got cut off there towards the end though.
If you’re suggesting that the Government “NEEDS” to have debt to survive I would have to respectfully disagree. While there are some big differences in Federal, state, local, and personal finances, how you handle money is universal. Spend LESS than you bring in! Debt is not necessary ever in my book. Yes the federal Government has an advantage, or more lie a disadvantage in that they can print money, but there is NOTHING different about how any of them should spend money responsibly.
You kind of lost me on the rest of your comment as you were kind of all over the place but I got the basic argument down. It looks like we agree for the most part except for about how the Government needs to have a deficit. Thanks for sharing your thoughts.
Jeremy, with all due respect, use some common sense! It’s ridiculous to think “Whereas households, cities, etc., have real budget constraints, the US gov. does not”
The federal government, like any other entity, small or large, is bound by the same laws of nature, like you and me, or a corporation: if you consume more, you have to pay for it somehow. Period. Yes, the scope may be different between government and a household, but the same essential rule applies.
You say “Whereas I can’t just print $100 to pay my mortgage…the US gov. can”. The government doesn’t just “create” money out of a vaccum…it’s a legal tender that’s supposed to be backed up by another neutral REAL valuable, like gold. If you devalue your tender because you print more than you have in reserves, you’re shooting yourself in the foot. You can’t fix debt by printing more money.
It’s jawdropping you would think “the US gov. issues it’s own currency, and creates a demand for it by forcing people to pay their taxes in that same currency”. We the people fund the govt through taxes to pay for what it does, and if it can’t get it’s own house in order, watch us force IT to deal with what we already give it. Govt doesn’t “force” us to pay…we choose to fund it!
“Without the gov. spending money into existence (i.e. issuing debt), you, me, cities, states, etc. don’t have any money to save, spend, pay down debt, etc”. Another false idea. I, you, cities and states make our own money (we actually also fund cities and states). We don’t need the government to give us money for anything. Thanks.
I’m sorry, but wow, it’s amazing how people can believe such ilogical ideas…no wonder we’re in such bad financial shape. Raising the debt limit is a bad idea. Stop spending!
Jorge I agree. The city state, and federal government need to follow the same kind of common sense principles as families do when dealing with money.
What’s the point in having a debt ceiling if you’re gonna raise each time you approach it? Absolutely ridiculous!
And I have to be honest, I’ve seen it in my own experience. I’ve done some reckless things and have been in debt for years now, and kept “raising my debt limit” by getting new cards to pay off other ones. It wasn’t until I made a choice and made a commitment to be rid of debt rather than just manage it that God has given me opportunities to make my life better. I’m almost done paying my debt! I still have some things to take care of, but things are much better.
I wish the government did the same thing.
Thanks for the response Jorge, and no disrepect taken.
I appreciate this is a hard/novel concept to wrap one’s head around, to wit, the idea that the US fed gov is not revenue constrained like a household or a state. And I readily admit that I may not be the best in the world at articulating myself. I do, however, know a little about what I saying having studied economic history and theory for the past 15 years.
On your first point, if the USD were “backed up by another neutral REAL valuable, like gold,” you would be right. But the gold standard hasn’t existed in the US for decades though. In fact, throughout the history of the US, M1, M2, and M3 (broad measures of the US monetary supply), have steadily increased–in other words, the US has been printing more and more money ever since it came into existence. There is nothing constraining the gov. from printing more money. The gov cannot print wealth, but it sure as heck can print as many USDs as they want. Your comments confuse fiscal policy with monetary policy.
As to your second point, try paying your taxes in Euros.
With respect to your third point, you don’t make your own money Jorge. You may earn your own money, but you don’t create it. You could be paid for you work in pumpkins, silver ingots or in copies of the NY Times, but I bet you prefer to be paid in USDs. Those dollars come from your government like it or not.
Again, I understand that this may seem illogical to you, but thoughts have nothing to do with the economic woes of this country. The reason for the economic woes are the finacialization of the economy, too much household debt, and a fundamental misunderstanding of how modern monetary policy works in this country. Federal debt is NOT reason for the downturn in the US/global economy–it’s the scapegoat politicians and banksters are using to further their own agendas. Arguements about the debt ceiling are just plain irrelevant. Peg debt to GDP and we’ll reign in spending. To be sure, the gov should spend less, and tax less–how much less of both is the real issue.
Brad, sorry to use your forum as a soapbox, but I just feel these are important issues.
Thanks Jeremy and NO NEED at all to apologize! I welcome this type of discussion and am glad you came back to clear some things up. I think you made your points in a respectful and responsible way. I definitely agree that as far as how the government receives money is much different than you or I, but I still think that the government has a responsibility to handle other peoples money as they would their own. It’s no secret the government has been squandering tax dollars on wasteful projects, and no doubt most of it has to do with their own agendas and siphoning votes through promises made to lobbyists etc.
When I wrote this article I sure didn’t think of it on a grand scale, I just took a concept that most people understand — income versus outgo — and wanted to suggest that if anybody followed the example of the federal government, or state and local governments as well, they could expect to find themselves in the same sort of situation that many states are now in. The basis for raising ones credit limit because they ran out of money to borrow suggests a problem that I think people fail to recognize even when it comes to the federal government, and that is that if you spend more than you take in, regardless of where the money comes from (printed or earned or stolen), you should expect to continue the problem as opposed to resolve the need to borrow more money in the first place.
I’m no fan of our federal government, democrat or republican, it doesn’t matter. they are all guilty of putting this great country in this situation but I do agree with you that household debt has an impact on where we find ourselves currently with regard to the recession and people struggling to make a living because they weren’t prepared. That was my basic point, but I certainly appreciate you stopping by to share some of your knowledge and opinion based on your many years of study. Come back anytime! 😀
One things for sure regardless of what you believe — we are in trouble if we don’t find solutions and FAST. 😀
With all do respect… what Jeremy is saying is 100% accurate. The US Govt is not revenue constrained. It does not need your tax money or China to purchase it’s debt in order to spend money. It literally can spend an infinite amount. The only restrictions on Govt spending are human imposed restrictions (such as the debt ceiling). But the debt ceiling can simply be changed with a stroke of a pen and has no real constraint on our actual ability to spend.
The debt truly is something that the majority of this country does not understand and it’s purely a political talking point. What you got to do is to try an realize that the Govt isn’t an actual thing with wants and needs. It is a group of people that represent the 310 million American’s. So when the “Govt” spends it credits our physical bank accounts putting more money in to the economy. When it taxes it debits our physical bank accounts taking money out of the economy. We then use that money to purchase real goods and services. All that money flows through out the globe, which allows country’s like China to accumulate $1 trillion in USD. We can spend money regardless of what China does with their $1 trillion. And China is limited in what it can do. It can purchase expensive ass US goods, it can put the money in a vault, or it can store it in to interest-bearing treasuries. The latter is really their only reasonable option.
The only constraint on Govt spending is literally inflation. And with 9.1% unemployment and 68% capacity utilization… we have so much room for productive growth that inflation really isn’t a worry. We are killing ourselves by no understanding the system. When you balance the budget or have a surplus in which you take more than you put in, you are only making us poorer as a country. Meaning we have less currency to purchase and create real goods and services.
The debt truly isn’t the problem people think it is. It will never be repaid, it will always grow, and it should always grow. We as a country should not want to shrink ourselves and make ourselves suffer. If we need more teachers, get more teachers. We aren’t constrained by anything other than our productivity (which is a direct influence on inflation). It is a very very complicated subject and requires thinking outside the box and logically about how the real world economy works.
If you can understand that you or I or any private sector individual can not add real money to the money supply, then you will realize that all we are doing is passing around the money that the Govt (aka all of us) lends to ourselves. So once again, cutting spending and paying off the debt would us to pay ourselves back for the money we lent ourselves. Kind of a tricky subject… but once it clicks, it all makes sense and really broadens your view on how the Govt (public sector) and private sector economy coexist.
So you’re saying that just because the government CAN print money that they can’t cut spending and balance a budget? Just because they can print more money doesn’t mean they can’t manage the money coming in better, and that’s the problem we are currently facing. To me it doesn’t matter if they can print money. Isn’t it obvious that the reason we are more than 14 trillion dollars in debt is because they haven’t managed it well. That’s exactly how it happens with households across the country so it is EXACTLY the same thing. The only difference is that instead of printing money in a household we go out and borrow money we don’t have.
I’m not saying I disagree with your points here, but I do think you’re missing the bigger picture of my article. If you want to be successful and wealthy do not spend wildly and irresponsibly like the Government does. The government is in the debt it is in because they have and if households act in the same manner they will get the same result. All that other stuff is really irrelevant to me. Spend like the Government and you’ll be BROKE!
Brad,
You are missing the point here. The Govt isn’t revenue constrained. You and I are constrained. If we go and take out a loan for $100, we have to go out and earn $100 from an EXISTING pool of money to pay off that debt. Hypothetically, if no one spent any money you would not be able to pay off your debt.
The Govt doesn’t have to earn money to spend money. It simply spends money. The process of Govt debt creation has a step in their in which banks create money, loan it to the Govt, the Govt in turns gives the bank an account at the Treasury known as a TT&L account… and the Govt goes and credits our accounts.
Essentially the debt is bought twice. Once with a loan that came out of no where, and once on the secondary market from the Fed or China, or you.
So when the Govt spends, they aren’t borrowing. “Borrowing” is their accounting term to create a liability for their spending.
We are in a completely new economic system than the gold standard.
The government isn’t revenue constrained you’re right. We are (sort of). When I wrote this article my point was that if we acted like the government we would be flat broke, like the government. Although there is a difference in how we receive revenue/income the one truth that should be observed regardless of what the Government is currently doing is that spending needs to be under control. Just because the government is currently NOT connecting incoming revenue with money that can be spent and therefore printing money to cover additional spending, that doesn’t mean it’s right or that it can’t be quickly put into check by doing what typical Americans usually do when they experience a pay cut or job loss. They/We/You have to cut spending so that we are not spending more than we bring in. The government CAN AND SHOULD do the same thing. Printing money is the dumbest thing the USA could have done long term, and now you are starting to see why.
For the life of me I can’t figure out why it ‘s so difficult for you to grasp the concept of my post. Sure there are differences but again, people should spend less than they bring in and that includes the government. To reiterate, if we the people follow the governments lead in how we manage our money, we’ll end up just as broke as the government. We do indeed have a system in place that allows us to “print money” into existence. I’m not talking about actually printing money but when someone goes out and borrows money that’s basically the same thing. It allows US to continue to spend more than we make without considering the true consequences of doing so.
How is us going out and borrowing money we don’t have any different than the government going out and printing money it doesn’t have? They might be different technically but what they accomplish collectively is very much the same. Both get money that they didn’t have before to continue the bad habit of spending money they shouldn’t.
I think we’re in trouble when the “experts” in economy that come out of “think tanks” start saying things like “(the govt) literally can spend an infinite amount” and “the debt truly isn’t the problem people think it is. It will never be repaid, it will always grow, and it should always grow”. The “expert” economists and politicians think they know better with their complex theories. Common sense always prevails, and the laws of nature, and of God’s nature rule in the end. Keep piling debt, and watch the dollar get devalued as it’s been, and watch inflation skyrocket, like it did in Germany in the last days of the Weimar Republic, when prices of comodities doubled everyday, and your economy collapses. It’s insanity to think that is no problem, that we can keep spending.
This country was founded on common sense, with the average informed american worker having an understanding of the issues we faced, based on common sense. If you have and intellectual or political ellite trying to tell you that “it’s too complicated, just let the “experts” take care of it”, then we’re in trouble. Thankfully COMMON people are recognizing the lies and taking charge of the country, as we’re seeing with the tea party.
I agree Jorge! The government is out of control, and it won’t just fix itself. It’s going to take people voting out the clowns that have got us here and furthermore, we need to get our own houses in order! The government isn’t any kind of a solution. The solution is personal responsibility and self reliance! Until we realize the government is the problem things will continue to get worse. The entitlement crowd is making our situation worse. It’s really quite selfish f you ask me. Expecting a government to take care of you when you have the ability and freedom to do for yourself at the cost of the entire country is the ultimate selfishness. What those people fail to understand that if they keep getting what they feel they deserve, eventually they’ll get nothing because there won’t be a country as great as the one we currently live in. Giving up entitlements is worth the welfare of the country!
Jorge,
Alright, how is what you are saying is common sense. What you say is backed by absolutely zero facts. You bring up the Weimar Republic acting as if the only reason they failed was because of fiat money. They failed because they tried to destroy the world and lost. They were left completely ravished with no productivity and reparations to pay to the rest of the world. That is why they failed. Hyperinflation happened because of this failure it didn’t cause this failure.
Think about it logically. In 1980 we were $800 billion in “debt”. In 2011 we are $14 trillion in “debt”. We have experienced exponential growth in our economy during that time. Don’t you think it is a little odd that we make tons of “USD”, which is a made up fiat currency and borrow tons of “USD” at the same time, which is a made up fiat currency?
I am not lying to you, this is how the accounting of America works. The bond market (aka the debt market) is simply set up to control the demand for money and combat business cycles. When the Govt deficit spends it is giving you and I more money to purchase and create new goods and services. It is not borrowing from you and I. If you get this money and want to invest, you can purchase a treasury from the secondary market (as in it was already purchased).
These are very very important things to understand about how our economy works. You can still be a conservative, and you can still be a fiscal conservative and understand that our Govt controls are level of available money. It should make sense to you since the only way we can pay off this debt is if we tax more than we spend… which if you think logically about, just means the Govt is extracting more money out of the economy than putting in. Which is exactly the opposite of deficit spending.
Yes, Paul, we’re in a a completely new economic system away from the gold standard, a move that in my view is really bad. Money now is backed up by thin air…and when we just print money without any real value/backing, and spend more than we have real value to show for, we’re eventually going to suffer the consequences of it. Inflation, devaluation of the dollar, a sucky economy and a loss of the “full faith and trust” of the federal goverment.
Jeremy/Paul. Thanks btw for the lively debate. I think this discussion is important, so thanks.
I think this is where we disagree. Yes, fact is the US has moved away from a gold standard and now it doesn’t think it’s important to avoid printing more money than it has in gold. Where we differ is that you guys seem to think this is ok, and I think this will eventually catch up with us and cause terrible problems. Make sense?
Step back for a moment on how the system works now. Jeremy, you say that the gold standard hasn’t been in place for decades, and you seem to infer that’s a good reason not to worry about it. I say let’s ask the question, is this the way it SHOULD work? I believe it’s not, and if we’ve been doing something wrong for a long time, I think it make more sense to go back and fix that, instead of keep doing the same wrong thing out of inertia. Doesn’t it raise some sort of danger flag with you that we don’t back up our USD with gold?
I think people don’t see a problem with not being on the gold standard because nothing bad seems to be happening, the US has had the strongest economy for decades. But now it’s catching up to us. Like a market bubble, we’ve been riding an “unreal” financial system and the USD has been losing value in recent years. Add random global economic crisis and now we’re vulnerable. The minute our debtors decide to raise interest rates or stop lending us money, we’re in trouble, we’d see hyperinflation and devaluation. Why tie our wellbeing to other countries’ decisions?
Great points Jorge! Just because the system being used today allows for what is going on to continue, that doesn’t mean we have to accept it. 😀
The problem is, there is nothing wrong with our system framework. The problem is how we interpret the framework and what we are doing with the knowledge of the framework. This whole debt ceiling debacle is absolutely insane if you understand what it all means.
And the way they describe the country being in debt is also insane. Government debt is just simply Govt spending. It is the amount they have credited our accounts.
With all politics aside, just think about this in a mathematical sense.
Every year tons of Govt debt matures. I think last year $3.2 trillion matured. So ask yourself, why is this expenditure not including in Govt spending?
And then think about it logically. In our system every dollar is backed by an interest bearing debt whether issued from a bank loan or from Govt debt. So the reason why we don’t use your tax dollars to pay down the principal on the debt is because that exchange would create dollars in the system not backed by debt. That is why you will never actually see the debt decrease. It is mathematically impossibility with the way our system is structured.
The reason why interest and the amount the Govt spends above taxation has to be “borrowed” is because accounting wise it does not exist in our system.
Principal pays for principal
Taxes pay for spending – deficit spending
Deficit spending doesn’t exist
Dec 2008 I could no longer deal with debt, it was pretty much controlling my life. I made the decision that it had to go… all $43,000 of it. If I stay on track everything should be paid of Dec this year or Jan 2012. I cannot wait for the day. I know that I could be paying it off sooner if I would cut back some more but I am fine with where I’m at. If I didn’t take a vacation here or there I would go crazy (I currently work full time (M-F) plus have 4 other part time/occasional jobs that consume week nights, weekend days and nights). Right now I’m living like no one else (well that I know) so later I can live like no one else.
Congratulations Erin! I am rooting for you to have it paid off before the end of this year! That would totally ROCK!!! Keep doing your thing and as you get closer and closer you’ll find that your motivation will become more and more intense! Love hearing stories like yours so I hope you’ll do the Debt Free Questionnaire when you become debt free! So EXCITING!!! 😀
Brad, I am so with you on this topic! Perfect analogy.
Thanks Jennifer! 😀