Understanding the Danger of the Debt

This, friends, is why we absolutely CAN NOT afford another bailout, CAN NOT afford the multi-trillion dollar government takeover of health care, CAN NOT afford to ship BILLIONS of dollars over seas every year under a Cap-and-Trade treaty, and just CAN NOT continue to endless stream of government handouts and freebies with no accountability. The Obama/democrat spending train MUST be derailed before our nation implodes.


Recognizing the Danger

As of today, the United States government has borrowed $12,013,338,919,392.31. Such an enormous debt poses short-term and long-term dangers.

The most immediate problem is that we are spending huge amounts of money just paying the interest. In 2008, we spent $253 billion on interest alone — that’s six times what we spend on the Department of Education, or thirteen times more than NASA. All just for interest payments, and much of it to foreign governments.

Over the next ten years, the debt is expected to almost double in size, to about $20 trillion. Our annual interest payments will grow even faster, to $675 billion in 2019. That’s more than all the money we spend presently on national defense, and much of it will flow to other countries.

A growing debt means higher taxes, painful cuts in government services, job loss, and a very real danger of economic catastrophe. Unless we stop this out of control spending now, the consequences could be devastating.

How bad could it get?

To understand how bad the debt situation could get, it’s important to understand who we actually owe the money to. The government can get loans from a few different sources:

  • Private investors
  • Foreign governments
  • The Federal Reserve
  • Intragovernmental holdings

The majority of the debt is in the first two categories. Those investors include individuals and businesses (especially banks), as well as foreign governments (especially China). Other countries buy our debt because it is a good investment — they trust us to pay them back, with interest. The most recent figures show we owe about $3.3 trillion to the governments of other countries, including nearly $800 billion to China alone.

The debt is dangerous because it isn’t under control. We cannot force anyone to loan us money, and the interest we pay can become more expensive. If that happens, our expenses go up, but our income doesn’t — so we sink even further into debt.

If investors are unwilling to lend the U.S. money, the government can go to the Federal Reserve. The Fed can literally create money out of nothing (print it), and then lend it to the government. This already happens — the Fed has lent about $270 billion to the government in the last year, in response to the credit crisis. But creating new money has a catch — inflation. Printing money can lead to a vicious cycle, as inflation devalues the money already in the economy.

What If We Can’t Pay it Back?

If the debt keeps growing, eventually we just won’t have enough money to pay the interest. There are two options at that point: default or inflation.

Default

We don’t know for sure what would happen if the U.S. defaulted. Credit depends on trust and expectations, and for much of our history the United States has been acknowledged as the most trustworthy and reliable borrower in the world. We benefit tremendously from that trust, as people are willing to lend us money even when everything seems to be going wrong. But if that trust is broken, the mountain of debt would cause economic chaos far beyond anything we have seen in the past few years.

Not only would defaulting destroy our credit rating, but everyone who has invested in Treasury bonds would lose their savings. Thousands of pension funds would fail, and tens of millions would lose their retirements.

The problem would be all the worse because U.S. Treasury bonds are supposed to be the safest investment of all: they don’t pay a high interest rate, but investors buy them with the money they cannot afford to lose.

Inflation

In a worst-case scenario, the alternative to defaulting on our loans is to borrow more money from the Federal Reserve. But if the Fed starts printing trillions of dollars, that will dramatically lower the value of the money already in the economy. Once a cycle of government-caused inflation is started, it is very difficult to stop. Many countries have fallen into an inflation trap, including Argentina, Zimbabwe, and Hungary. Learn more.

Every year that we overspend, we are depending on investors to lend us money. As long as they believe we will repay the money, we can keep spending. But as Nobel-winning economist Paul Krugman writes, if we allow our debt to expand without a credible plan to get it under control, “investors will eventually conclude that America has turned into a third world country, and start to treat it like one. And the results for the U.S. economy won’t be pretty.”

How Can We Defeat the Debt?

The solution is simple, but that doesn’t mean it’s easy. When you already owe a lot of money, the first step toward recovery is not borrowing more money. Every year we wait to address this problem, the debt grows larger and the solution gets more expensive.

If we spend less than we collect in taxes, the difference can go towards paying down the debt. In 1999 and 2000 we had a budget surplus of about $360 billion, but since then we have borrowed about $6 trillion, or $6,000 billion.

That ability to pay down debt came from increased tax revenues, which in turn were the result of an expanding economy. But the massive size of the new debt threatens to slow our economic growth and make repayment much more difficult..

Not Another Zimbabwe

Out-of-control debt led Zimbabwe, once one of the strongest economies in Africa, into economic ruin and a humanitarian crisis that has yet to be resolved.

Descent into Debt: Zimbabwe’s Story

Some critics worry that our escalating national debt will lead to an inflationary crisis. A look at the first inflationary crisis of the 21st century, in the African nation of Zimbabwe, provides an illuminating case study of the consequences of runaway debt.

Zimbabwe’s 12 million inhabitants have experienced some of the worst currency inflation in history. By one estimate, over the last decade, Zimbabwean currency was devalued (i.e. lost its value) by 89 sextillion percent. (One sextillion is a billion trillion or 1,000,000,000,000,000,000,000!)

Defaulting on the Debt

While inflation of the Zimbabwean dollar had been high for years (approximately 50% in 1998, 1999, and 2000), it wasn’t until 2001 that the crisis began in earnest. In 2001, Zimbabwe defaulted on its loans from the International Monetary Fund, and on top of that, owed more than $4.5 billion to foreign countries, the African Development Bank, European Investment Bank, and the World Bank. The IMF estimated that in 2001, Zimbabwe’s external debt totaled 64% of the nation’s GDP. The country’s credit was ruined, and the government could not get loans elsewhere. Investors around the world were understandably unwilling to risk their money by lending to a nation that had just reneged on billions of dollars in outstanding debt.

Printing Money

Deprived of foreign sources of credit, the government began to simply print large amounts of money to pay for its operations. The money was then sold on the foreign-exchange market for U.S. dollars, and used to pay the country’s loans. This attempt to restore the country’s credit rating flooded the market with vast amounts of Zimbabwe’s currency, devaluing the money held by Zimbabwean citizens.

The government quickly became addicted to printing more and more money in order to pay its internal and external debts. As a result, all the money in circulation was being constantly devalued.

If a new municipal building project was needed, the government of Zimbabwe simply printed more money. With little revenue with which to pay public employees, the government printed new money to pay them every day. The international community quickly caught onto the scheme, but the country’s citizens were trapped.

Hyperinflation

This cycle of hyperinflation destroyed people’s life savings. The economy fell into ruin. A functioning economy became impossible when the value of currency literally dropped by the hour. Long term investments disappeared. Basic goods and services were nowhere to be found. Credit was non-existent.

The pace of inflation was so fast that the value of the Zimbabwean dollar changed by the hour, and by 2008, prices were doubling every 1.3 days. At that rate, a bag of rice that cost $10 on Monday would be $80 by Friday. In July of 2008, the inflation rate was estimated at more than 200 million percent, though many say that number fails to capture the heights to which inflation had soared. Time Magazine reported in July 2008 that a pint of milk cost three billion Zimbabwean dollars, or about 30 U.S. cents. Another estimate by the Institute of Commercial Management claimed that 1.2 trillion Zimbabwean dollars was worth one British pound.

Despite the government’s attempts to rebase the currency by literally lopping off 10 zeros in August 2008 and 12 zeros in February 2009, inflation continued to rocket out of control.

The Death of a Currency

By early 2009, the Zimbabwean dollar was effectively worthless. The government was issuing bills in denominations up to one hundred trillion dollars.

At the end of January, citizens of Zimbabwe were allowed to conduct business in any currency, and on April 12, 2009, the Zimbabwean government gave up on the official currency and suspended its use.

Zimbabwe’s Tragedy

Once one of the most successful countries in Africa, Zimbabwe is now one of the poorest in the world.

With no regard for the future of the country, Zimbabwe’s leaders chose a path of reckless borrowing—and then tried to pay their debts by printing more money. This devastated the economy and precipitated a humanitarian crisis and the death of a currency.

The United States is not Zimbabwe, nor will it ever be. However, as we consider the magnitude of our growing national debt, it is useful to look to the example of a nation that chose to ignore its own national debt for too long and paid a very, very dear price.

Top Ten Inflation Rates in the World In 2008

  1. Zimbabwe 11,200,000.00%
  2. Ethiopia 44.40%
  3. Seychelles 37.00%
  4. Venezuela 30.40%
  5. Mongolia 28.00%
  6. Burma 26.80%
  7. Kenya 26.30%
  8. Iran 25.60%
  9. Ukraine 25.20%
  10. Kyrgyzstan 24.50%
Source: CIA World Factbook, est. 2008

They Never Saw it Coming

Many nations have been devastated by unexpected debt crises.

California

In 2008, the state of California needed to borrow or raise $40 billion. In a special election, voters rejected higher taxes. Because state law requires politicians to balance the budget, the state was forced to lay off thousands of employees, raise some taxes, and cut billions from popular programs. Californians will pay far more to borrow in the future, as the state’s credit rating dropped from “A-” to “BBB”. Despite the size of California’s crisis, that $40 billion shortfall is only 0.3% of the size of our national debt.

Japan

A stock market and real estate bubble in Japan led businesses and individuals to borrow far more than they could repay. When the bubble burst in 1990, the Japanese economy was crippled. As of 2008, the Japanese stock market was actually lower than it was in 1982.

Argentina

From 1975 to 1991, Argentina’s government embarked on a strategy of printing money to pay its debts. The eventual inflation was so great that 100 billion Argentine pesos in 1975 were worth 1 peso in 1992. If the same thing happened in America, Bill Gates’ fortune of $60 billion would be worth 60 cents.

Thailand

In the 1990s, the Thai government accumulated a huge amount of foreign debt. In 1997, the government was so overextended that it could not afford to protect the value of its own currency. In a few months, the Thai baht lost 40% of its value, 1.5 million people lost their jobs, and the Thai stock market lost about 75% of its value.

Iceland

After Iceland’s biggest banks declared that they were unable to repay their loans, the government nationalized them to avoid disaster. The country had to borrow huge amounts of money to afford the takeovers, and now every Icelander owes the equivalent of $156,000.

Zimbabwe

This small African nation has experienced some of the worst inflation in history. For a decade, the government continually printed more money to pay its debts, so all the money in circulation was constantly devalued. The pace of inflation was so fast that prices were doubling every 1.3 days. At that rate, a bag of rice that cost $10 on Monday would be $80 by Friday. By one estimate, Zimbabwean currency has been devalued by 89 sextillion percent. (One sextillion is a trillion trillion!)


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