Oct

Understanding the National Debt

Lawrence Kadish wrote an informative op-ed piece for The Wall Street Journal about our national debt. It’s something every American should read. The last thing politicians in Washington DC should be doing is expanding expensive social programs until they get our fiscal house in order. Unfortunately, it looks like the national debt is only going to continue expanding.

When the government spends more than its revenue, there is a budget deficit. These deficits are paid for by Washington selling interest bearing Treasury securities. If the government were ever to default on its promise to pay periodic interest payments or to repay the debt at maturity, the United States economy would plunge into a level of chaos that would make the Lehman bankruptcy look like a nonevent.

It is the interest on the national debt that makes our future unstable. The exploding size of that burden suggests that, short of devaluing the dollar and taking a large bite out of the middle class through inflation and taxation, there is no way to ever pay down that bill.

As of Sept. 30, 2009, the national debt was almost $12 trillion and interest on that debt was $383 billion for the year, according to the Treasury Department’s Bureau of the Public Debt. The Congressional Budget Office on Oct. 7 estimated the 2009 budget deficit to be almost $1.4 trillion (about 10% of GDP). In August, the White House Office of Management and Budget (OMB) estimated total government revenues at about $2 trillion. The revenue estimate included $904 billion from individual income taxes. This means the cost of interest on the debt represented more than 40 cents of every dollar that came in from individual income taxes.

Imagine if 40% of your household net income went to paying interest only! You’d never get out of debt. That’s exactly what’s happening with the federal budget and politicians try to make us believe that somehow borrowing and spending more is going to solve the problem. Amazing.