Why Is America Broke?

Yesterday, I opined that America is broke.  Today, I explain why I think that.  Imagine I have a credit card debt of $100,000.  To make the math easy, let’s say I pay 10% interest and let’s forgot about compounding.  The result is credit card interest of $10,000.  So far, so good.

Now, let’s say my income is $75,000 and my expenses are $85,000.  In other words, I have to borrow $10,000 a year to pay the bills.  That means an additional $1000 a year in interest on top of what I already pay.  In ten years, my interest payments will double (actually it is more than that, but we won’t do the math here).  Every time my interest payments go up, though, I have less to spend on my other expenses.  Thus I have to borrow more and pay more interest in a vicious cycle.  As the old saying goes, “The hurrier I go, the behinder I get.”

Interest on the debt (full article)

In fact, our personal budget would look something like the graph above.  US interest payments are estimated (by the government itself) to go from $200 billion to nearly $1 trillion dollars by the year 2020.

Most of us would soon figure out that something has to give, like reducing spending or making more money.  Duh.  Alas, though, government has a dismal history of actually cutting spending.  Increasing revenues?  There’s an idea, but again, Congress tends to spend the additional revenue and more.

In other words, we are hosed.  The most likely scenario, in my view, is for Congress and the Executive Branch to ignore the realities of the growing interest payments until a solution is imposed upon us.  No one escapes the markets forever.  Eventually, we will be forced to pull the last rabbit out of the hat by monetizing the debt.

What is monetizing the debt?  This is where the analogy of a personal budget breaks down.  The US can print money, always ensuring that the interest is paid, in theory.  In reality, as more money is printed, inflation takes hold.  There is a long history of this phenomenon, including earlier eras in our own country.  The dollar will become worthless, just as the Continental and the Greenback did.  Not pretty.

It is largely because a despicable cadre of political entrepreneurs has hijacked the banking and finance system that we face this crisis.  Many (but by no means all) of our wealthiest citizens are rich because you and I are paying them in the form of subsidies and protection from competition.  They have rigged the game.  So why don’t we just take that money back?  Soak the rich?  Cut the tall poppy?  Bend the nail that sticks up?

Good luck with that one.  First, alongside the politically rich are the honestly rich. The last thing we need is to take money from the honestly productive and give it to the government.  And good luck sorting out the two anyway.  Second, even if we could sort out the two, it would not cure the root disease, which is the ability of politicians to play favorites with businesses.

So where does all this leave us?  On the brink of a crash.  That is, unless we radically reduce the role of government.  That means essentially separating government and the economy.  Do you have the appetite for that?  Better develop one.  Otherwise, you will find a much worse meal waiting.

 

 

 

 

 

 

 

 

 

 

 

 

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About Terry Noel

I am an Associate Professor of Management and Quantitative Methods at Illinois State University. My specialty is entrepreneurship. I also write a regular blog on limited-government topics: http://commonsenseliberty.com
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4 Responses to Why Is America Broke?

  1. Diane Benjamin says:

    You are my ray of sunshine on a cloudy day. Thanks Terry

    Like this

  2. Greg says:

    The easiest solution is raising or restructuring the mechanisms in which we collect taxes. Let me ask you this. My father was a well respected CPA in our community. He was in favor of establishing a National sales or consumer tax and abolishing income tax.

    Has this kind of study ever been researched?

    Like this

    • Terry Noel says:

      Gregg,

      That is an outstanding question. Your father was on the right track. I will research that topic in the near future and write a blog. I know studies have been conducted, but have not read them thoroughly. The one thing to keep in mind is that having a gazillion separate taxes is what give Congress its power. It is the major way they play favorites. It will take unprecedented pressure at the polls to make them give that up.

      Terry

      Like this

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