Imagine, if you will, that you are under a mountain of debt. Credit card bills, car payment, a big mortgage, and who knows what else. Of course you still have to meet regular life expense obligations, such as food, utilities, and clothing. After much stress you sit down one day to try to figure a way out.
You fire up your calculator or spreadsheet and figure out the incoming and outgoing funds, and you notice that you are stretched way beyond your means. What are your options at that point? For most people, there is really one option. Cut back on expenses and set a realistic goal to climb out of the hole.
The US government's financial picture is not unlike the above scenario. It is true that the finances of the US government is much larger and more complex than that of an individual, but when you boil it down, and cut the mumbo jumbo, it comes down to the same simple idea of balancing income with expenses.
Today the US government is up to its proverbial neck in the red. The national debt is nearing 8.5 trillion dollars. That is nearly $30,000 per each citizen. It is a staggering sum and there seems to be no end in sight in reducing this amount. So what does the US government do when faced with such a dire situation? It raises the debt limit!
Wouldn't you love to be able to do the same when faced with the same issue? Imagine picking up the phone and calling your bank with the news that you have decided to raise your own debt limit. Of course they will laugh at you and then hire a bunch of collectors to hound you around the clock.
The US government is in effect doing the same thing. When they over-spend, they just raise the national debt ceiling and print more bonds to sell. Who are the buyers? Some are domestic, but many are foreign-based. China, for example, is one of the biggest buyers of US bonds and that means they own a big piece of this country's future. The US has never defaulted on its debt, but there could come a time when buyers may begin to get uncomfortable with the debt levels and pull back on their spending. That could result in a precipitation of confidence in US bonds, and would force the US government to offer higher interest rates to attract buyers. But even then, there is so far it can go before igniting rampant inflation and throwing the country into financial disarray.
The specter of impending doom and gloom might sound alarmist, but the US had better get its financial house in order soon. Otherwise we will have years or inflation and higher taxes to look forward to at best. At worst, the US government could default on its debt, declare bankruptcy, and put itself up for sale to the highest bidder. How do you pronounce Washington in Chinese?