Say you and your spouse both clear $30,000 per year after you pay your taxes. That gives you $2,500 per month to spend as you like. But we all know life doesn’t come at us in $2,500 increments. Sometimes, we’re faced with unexpected medical bills, or an emergency car repair. The smart thing is to set aside an emergency expense fund. We call that “savings.” Most Americans don’t have much of that, and the U.S. government (excluding sellable assets such as Yellowstone National Park) has none.
To weather the financial ups and downs, many families rely on credit. We borrow to pay for expenses, with the promise we’ll pay the money back — with interest to the lender. Sometimes, we make foolish purchases with our credit and bite off more than we can chew. The U.S. government does the very same thing — on steroids. Here’s the fork in the road: Since the wakeup call of 2008, banks have wised up and tightened lending policies to you and me. The American people have also wised up, paid down credit cards and borrowed less. Not the U.S. government. Why? Because the holder of our federal purse strings — Congress carries the greatest credit card ever printed, with a whopping $14.3 trillion limit. Their limit is high and their interest rate is relatively low for one reason: it’s backed by the full faith and credit of the U.S. government. (Not Congress, but you and me.)
So here’s the crisis: Our creditors — China, South Korea, Saudi Arabia, Japan, etc... are getting nervous about our ability to make prompt and timely payments on our national credit card. In fact, they’re starting to worry — for the very first time since the Revolutionary War — that we might default. In the private sector, some American families default on their loans and file for protection from their creditors by declaring bankruptcy. That’s never been necessary for our spendthrift Congress. Why? Unlike you and me, Congress gets to set the limit on how much they can borrow. So they’ve continued to spend and spend and spend, because they had and continue to have the power to raise their credit limit, that is — until now.
Congress is playing a tired game called “let’s argue about the debt ceiling, get the American people worked up — energize our political bases and, at the last minute, raise the debt ceiling and keep on spending!” Remember, the tea party called for $40 billion in spending cuts, but very few in Congress — Republican or Democrat — support that.
Why? Because providing tax breaks and grants for the conservative and liberal interest groups that paid for their election campaigns are their surest path to re-election.
The American people have been demanding real spending cuts since Ronald Reagan’s first term, yet Congress will never do it. However, one day, and it may be soon, our lenders will realize not even the great U.S. economic engine will be able to keep pace with our debt, and just like that, our way of life will collapse, but not quite yet. Congress will buy a little more time, raise the debt ceiling and kick the can a little farther down the road. Remember, we’ve all seen this movie before.