DEBT
This is a word that you rarely hear mentioned much by politicians especially if they are campaigning for office. Oh, sure you might hear something about how they will fix the deficit. The deficit that the other guys have allowed to run rampant will be fixed.
Oh, sure we will cut the deficit by about 10% a year and then in about 10 years we will have that nasty deficit tiger tamed. Usually the savings are conjured up by playing up how growth and thus tax receipts will be increased.
During an election when people or groups claim that these savings are either unlikely or not realistic. These nay sayers are usually accused of being partisan. Indeed this might be true but considering how optimistic politicians are (every single time) and how often they are incorrect – again virtually every single time maybe some pessimism is warranted.
How big of a deal is a 500 billion dollar deficit when compared to a 19.8 trillion dollar economy? Well, people have been hearing about the deficit so much they have forgotten that it really means unpaid bills or borrowed money. These small (ha) deficits are what keep adding up to mountains of debt.
| budget deficit | when your expenses exceed your income. |
| debt | the sum of all of the money owed. these values are essentially the sum of all budget deficits. |
It would take a real concerted effort to pay any large debt it off and downright impossible without reducing the budget deficit to zero.
But it this really a problem? Perhaps it isn’t a problem with these low interest rates. The Fed rate is currently at 1/2%. In one sense this debt bomb is less of a problem with low interest rates but it isn’t the principle that will be the eventual problem but the interest.
I considered writing up a spreadsheet to try and describe the future evils that will be visited upon the US, but the Internet Wallstreet Journal has already done some looking into this issue.
If you choose not to read the article, then at least read the headline.
The Legacy of Debt: Interest Costs Poised to Surpass Defense and Nondefense Discretionary Spending
This type of problem is not only limited to the US, one of the key weaknesses of the Maastricht was that deficits needed to be limited to 3%. Limited to 3% pretty much gives the EU members the option of never really balancing their budget.
Politicians have a tendency ignore anything that they really don’t wish to address. The key sentence for the Europeans.
annual deficits no greater than 3% of GDP
Sure, 3% is a small number but if it is left to grow at this amount even a 3% growth will cause the debt to double in about 25 years – assuming no unexpected circumstances increase the deficit. Well, I am sure that the EU countries are making sure that in some years they have a surplus – right?
I am a tech guy (not a banker) but it is pretty disappointing to occasionally hear comments from people who cannot tell the difference between deficit and debt, and (US) politicians that play on that.
There will be some real problems for big countries that have never had to make hard decisions on their budgets if things don’t change.
Tell your friends the difference, tell your family the difference or perhaps most important tell your politician the difference (and that it matters to your children and their children).
