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Why Government Debt Matters to You
You see much in the media about federal and state government debt. Most of the reports concentrate on the big picture. How many trillions of dollars the U.S. federal government owes or how many billions short a particular state budget is.
But few seem to address what that government debt means to the average person like you and me. How our lives are changed by the debts that our federal and state governments take on.
According to USDebtClock.org, the average U.S. Federal Government debt per citizen is over $42,000. And, they calculate that the interest per citizen at $2,800 per year.
So that means that you're paying $233 per month just to cover the interest. So it's a little like you and your mate are making a car payment every month for the rest of your lives. This is not to buy you a dependable set of wheels, but to pay the interest on the money that's already been borrowed in your name.
For a family of four, it's like having two new cars stolen from your driveway. If you're a car salesperson, those are two cars that you can't sell because the customer can't afford them. If you're an autoworker, those are two cars you don't get to build. Government debt takes money out of our pockets that could otherwise be spent and create jobs.
Maybe your taxable income is low. In fact, maybe you don't pay any taxes at all. So why should you care? You're not going to be paying any of that interest. That's for someone wealthier than you.
Well, you're affected, too. Every time that you go to borrow money, you'll pay more because you're bidding against the government. That's right. The government borrows its money from the same places that you do. So you have to outbid them to borrow money for your mortgage, car loan, or credit card account. Instead of borrowing at 8%, you'll need to pay 9 or even 10%. And, the more they borrow the worse it gets.
You don't need to pay taxes or borrow money to be affected by government debts. If you benefit from any government service, you can look forward to cuts in that service. With more of the government budget going to pay for interest, there's less available to pay for roads, school lunch programs or any other government services. So what should you do now to protect yourself?
Expect to see government look to save money in all areas. Be prepared to receive lower benefits on government programs. That includes Medicare, Medicaid, Social Security, and even government pension benefits. You may be fortunate and not have your program cut, but you'd be foolish to think it couldn't happen.
The next obvious step is to pay off any debt you currently owe. That eliminates the need to compete with the government to borrow money. Plus, you'll have more flexibility so you can adjust to a changing financial environment.
Also, be prepared for inflation. Unlike you and me, the government can print more money. That allows them to repay their debts in cheaper dollars. However, there is a cost. An increase in the money supply will cause prices to go up. And, we'll have inflation.
Some argue that government debt doesn't matter. They say that the government doesn't ever really have to pay back debts. Government can carry it forever. And, maybe that's true up to a point. But just like your family budget, if you want to be able to keep borrowing money, you absolutely must make your interest payments even if that means that your family can't pay rent or buy groceries.
The same thing is true for the government. At some point, the government won't be able to pay the interest due and still perform essential government services. According to U.S. Controller General David Walker, within 12 years the largest item on the federal budget will be interest payments.
You may hear the argument that the government can't quit spending in a recession even if they have to borrow the money being spent. That ignores the simple fact that every borrowed dollar increases the amount of interest that we'll pay next year and every year thereafter.
Someone might say that this article is political. It's not meant to be. Debt doesn't care which political party creates it. A dollar of debt created by either party will have the same effect on you. A state or country can't continually spend money it doesn't have. Any more than you or I could.
I'll leave it up to you whether you want to contact your elected reps and tell them to balance any budget they're responsible for. But, I'll admit that paying for two non-existent cars that aren't in my driveway isn't very appealing. And thinking that my children and grandchildren will be paying for them too is even less appealing.
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Gary Foreman is a former financial planner and purchasing manager who currently edits The Dollar Stretcher.com website and newsletters. You can also follow Gary on Twitter or on his blog.
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