This blog is a way for me to share hard learned lessons about money with those who are just starting out on their own. I hope it's a way for you to avoid making the mistakes I made, and to benefit from my experiences

Tuesday, February 13, 2007

National Debt Misunderstood

One of my favorite blogs to read is Blogging Away Debt. This week she posts a guest article titled Consumer Debt vs. Government Debt. How Can We Judge Congress When Our Plastic is Maxed Out?

Gov’t debt is a vastly misunderstood subject, and Ben seems to be just one of the misled.
Simply put, there is no reason this debt EVER has to be paid back. For virtually all of our country’s entire existence, the debt has never been paid back. It’s been rolled over.

Think of it this way. A person starts out their adult life earning generally low wages, and then throughout life as they gain skills and expertise, they continually earn more and more. This represents our country’s GDP.

That same person probably also starts with renting a small no frills apartment, and then throughout their life continually continually rent nicer and nicer homes, at higher and higher rental rates. This is interest on the ever growing national debt. (No home ownership allowed in this analogy, because that builds equity).

Since the nation will never retire, the GDP, and thus the tax revenues, will only continue to grow, and thus the gov’t can continue to afford the interest payments on more and more debt.

Here’s some interesting facts about the national debt:

Interest on the debt now consumes less percentage of government tax receipts than it did during Clinton’s time, despite Bush’s heavy borrowing. How can this be? Because tax receipts have also been growing heavily. In 1998, debt service consumed 14% of tax receipts. In 2006, it consumed under 10%. America’s ability to pay interest on the debt is becoming less of a burden, not more so.

Approximately 40% of the national debt is owed to the government itself. US Citizens own approximately 35% of the debt. The other 25% is owned by Foreigners.

While I would prefer that the federal gov't do a better job of living within it's means, and use debt only in times of recession, disaster, war or investing in building of new national infrastructure, it is not the boogeyman we all perceive it to be. Simply put, it is OK for the debt to grow, and continue to be rolled over, as long as the economy grows along with it, so we can continue to pay the interest.

I highly recommend you point readers to a blogger called The Skeptical Optimist for facts and views on the national debt that you just won’t hear anywhere else. He too is one of my favorite blogs.

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